What is life insurance?

Read our beginner's guide to how life insurance works in Australia.

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Life insurance can be a little confusing since the term is often used to include a range of protections, including death cover, total permanent disability insurance (TPD), funeral insurance and income protection.

Luckily, Finder is here to help clear up that confusion. Understanding how these individual cover types work, what they protect you from and which ones you need is the first step in finding the cover that's right for you.

What is life insurance?

Life insurance provides you with financial protection in life-changing circumstances, usually in the form of a lump-sum payment ranging from $25,000 to $2.5 million. In exchange for financial security, you pay a monthly or annual fee, more commonly known in the insurance industry as a premium. If something serious goes wrong, such as serious injury, illness or death, it can help you and your family cope financially.

How does life insurance work in Australia?

Generally, there are three different ways to purchase life insurance:

1. Go through an adviser. This kind of cover, known as retail cover, is usually recommended through a financial adviser. Your adviser will assess your current financial situation, compare options from a variety of insurers and determine the type of cover you need. The advantage of doing it this way is that you can get some expert advice and help working out what kind of cover you need as well as access to a wider range of different policies. The downside is that it often costs more.

2. Find your own policy. You can compare policies yourself, work out what kind of cover you want and determine which one is right for you. This gives you the advantage of being able to pick out almost any kind of cover and find exactly what you're looking for. Generally, it can get you cover equivalent to what you're able to find with an adviser but more cheaply. However, making sure you've found the right cover can be time-consuming, complicated and difficult.

3. Get it through superannuation. Superannuation life insurance is a special kind of life insurance that is often included in your superannuation automatically. Here, you pay your premiums through your superannuation contributions. The main advantage is that it can be cheap cover but you generally have limited options and it might not pay a big enough lump sum in the end to properly cover you.

Compare life insurance features side by side

Updated January 27th, 2020
Name Product Maximum Cover Maximum Entry Age Minimum Sum Insured Expiry Age
Real Family Life Cover
No expiry age as long as premiums are paid
Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™ .
NobleOak Life Insurance
Get your first month free. T&C’s apply. Offer ends 27 February 2020.
Zurich Ezicover Life Insurance
Get your first month free.
Medibank Life Insurance
No expiry age as long as premiums are paid
10% discount for Medibank health members.
ahm Life Insurance
No expiry age as long as premiums are paid
Get life cover up to $1.5 million. Plus, ahm health members can save 10% off premiums.
AAMI Life Insurance
Get life cover up to $1 million.
Guardian Life Insurance
No expiry age as long as premiums are paid
Cover up to $1.5 million with Guardian Life Insurance.

Compare up to 4 providers

What does life insurance cover?

Your personal circumstances will dictate both the types of cover you need and how much cover you need (based on the types of expenses you need to cover). Some common expenses that life insurance can help cover include the following:

  • Mortgage debt
  • Other personal debt, such as a car loan or a personal loan
  • Legal expenses that may arise following death
  • Funeral expenses
  • Education expenses, such as school tuition fees
  • Home duties that the policyholder managed
  • Everyday living expenses, such as food, clothing, transport, maintenance and entertainment

If you're single, you will only need enough cover to pay your bills, any outstanding debt and funeral costs. If you're married and have children, you will need to take their ongoing expenses into account as well, especially if you're the main income earner.

How much can life insurance pay?

Life insurance is usually paid out to your beneficiaries (the people you list on your policy) in one large payment ranging from $25,000 to $2.5 million. All you need to do is pay your monthly or annual premiums. The smaller the lump-sum payment you need, the cheaper your premiums will be. Everyone's life and budget are different, so how much you want your life insurance to pay out is really up to you. To give you an indication of costs, the average cost of a $500,000 life insurance policy for a 30-year-old is around $28 a month.

What are the different types of life insurance?

There are four main types of life insurance policy, and each is tailored to specific life-changing circumstances:

4. Income Protection Insurance

  • What does it cover? Income protection insurance pays up to 85% of your regular income if you're forced to stop working due to an injury or illness.
  • How does it pay you? In monthly instalments, like an income.

Does Life insurance cover old age?

Life insurance won't pay out for old age alone, but it can if you are seriously injured or ill. There are different kinds of policies that can protect you if this is the case. Standard life insurance will usually pay out if you are terminally ill. TPD insurance might allow you to retire if you become completely and permanently disabled. Trauma insurance, on the other hand, can protect you from many different issues including heart attacks or intensive care. Some of the things that may be covered by a policy include the following:

  • Alzheimer's disease
  • Cancer
  • Chronic kidney failure
  • Chronic liver disease
  • Chronic lung disease
  • Heart conditions, including heart disease, heart attack, coronary artery by-pass surgery, heart valve surgery and open heart surgery
  • Deafness
  • Loss or paralysis of limb
  • Severe diabetes
  • Severe osteoporosis (before age 50)
  • Severe rheumatoid arthritis
  • Stroke

When does life insurance cease?

Most life insurance policies are "guaranteed renewable", which means that it will only cease if you stop paying your monthly or annual premiums. It can also sometimes expire once you reach a certain age, but this is usually between 80 and 99 years old.

Be wary of the expiry age if you buy life insurance inside super. It's often the case that your life insurance policy will cease when you retire or around the age of 70 or 75.

How do life insurance payments work?

You will usually pay a monthly fee, known as a premium, to your insurance provider. Sometimes, you can pay for an entire year in one go. This is often a cheaper way to pay but your wallet is much more likely to notice the hit. Most of the time, you can simply set up a direct debit and pay your insurance provider directly. Alternatively, you can sometimes pay by cheque. When your life insurance pays out, the money will go to the people you nominate as beneficiaries on your policy.

The person whose name is on the policy is ordinarily the person who will pay the premiums. However, it is also possible to buy life insurance for someone else, such as a spouse, child or even a business partner. So long as you have their consent and insurable interest – e.g. they have some bearing on your finances – then it's possible to take out a policy for someone else.

If you stop paying your premiums, you'll generally be notified by text or email and receive at least one warning. It's uncommon for life insurance policies to be cancelled immediately if you miss one payment. However, your coverage will probably be stopped if you don't respond promptly to any of the warnings.

How does life insurance in superannuation work?

Life insurance through super is often automatically included when you sign up for superannuation. Rather than paying with your income, your premiums are deducted from your superannuation contributions. Life insurance through super is often cheaper, but that's because it doesn't provide the same level of cover. In other words, it might not be able to pay a large enough lump sum to protect the people you leave behind from financial hardship. The following are some key aspects of superannuation:

  • It's usually cheaper
  • You might not need to do a medical exam
  • It can be harder to prove disability
  • Payments are taken from your super, reducing your retirement fund
  • Pre-existing conditions are sometimes included
  • The expiry age is often lower

Choosing life insurance: FAQs

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