What is life insurance?

Find out what life insurance is and how it can help safeguard your family.

You can get insurance for almost everything. You pay an ongoing fee, and then if that thing is damaged or lost, your insurance can pay for it.

Life insurance is insurance for life itself. If you die, become disabled, get seriously ill or suffer a serious accident, then life insurance can pay a large amount of money to help out. Depending on the situation, this money might go to your family, go towards replacing your lost income if you are unable to work or go towards helping pay for medical expenses. You can also spend or save the pay out any way you want.

This is a beginner’s guide to life insurance, explaining how it works and some of the differences you might find between different kinds of life insurance.

What is life insurance? Cover explained in 2 minutes

What are the different kinds of life insurance?

There are different kinds of life insurance which can protect you in different ways by paying out in different situations. Often, you can choose which types of protection you want with a life insurance policy. Choosing more cover will cost more, but can also bring more protection.

  • Term life insurance. This cover pays out if you die or are diagnosed with a terminal illness. It is the core of a life insurance policy and pays out a large amount of money all at once as a lump sum.
  • Total and permanent disablement (TPD) insurance. This cover pays out if you become completely and permanently disabled, for example, if you become paralysed. It also pays out a lump sum all at once.
  • Trauma insurance. This insurance includes a long list of diseases and health conditions, like cancer, heart disease, quadriplegia and many others. If any of these happen, then this cover can pay a lump sum.
  • Income protection insurance. This cover is different because it does not pay a lump sum. Instead, it pays out a smaller amount every month. You can access this benefit if you are unable to work because of injury or illness.

Do I have to buy all these policies separately?

You can arrange different life insurance types in different ways. You can either get one bundled life insurance policy with the cover types you want or take out several different standalone policies to get the cover you want separately.

  • Bundled life insurance. This is term life insurance plus a number of other cover types. With this life insurance, you have a single sum insured for the entire policy. When any part of the policy pays out, it is taken from the total sum insured.

For example, you might have a bundled life insurance policy with term life insurance and TPD insurance. The total sum insured is $1 million, and the TPD sum insured is $500,000. This means that if you die, that policy will pay $1 million and if you become permanently disabled, the policy will pay $500,000. However, if you claim TPD insurance and then die later, it will only pay out $500,000 when you die since you already received $500,000 from your TPD claim.

Bundled life insurance will always include term life insurance. The main advantage of bundled life insurance is that it will often have lower premiums, so you can get multiple types of cover more cheaply. The main disadvantage is that there is only one sum insured for the entire policy.

  • Standalone cover. This is when you take out different types of insurance separately, so each has a separate sum insured and can be claimed separately. You can get different cover types from different insurers, and it is generally more flexible.

For example, someone who does not have a family might decide that they do not want term life insurance, but they still want income protection insurance and trauma insurance. They might take out a standalone income protection insurance policy and then take out a standalone trauma insurance policy.

To get the right type of insurance, you can mix and match these cover types in almost any way you want.

What am I paying for when it comes to life insurance?

  • How much does life insurance pay? The amount paid out is the sum insured. It is different for each type of cover and for each person. This is explained in more detail below.
  • How much does life insurance cost? The cost of a life insurance policy is the premium. It is also different for everyone and explained further below.

How much does life insurance pay?

Each cover type will have its own sum insured, even with a bundled life insurance policy. Depending on the insurer and the cover type, you might be able to choose your own sum insured or it might be set automatically.

The amount paid out for any cover type usually works in a similar way for both standalone and bundled policies. Insurers will set a minimum and a maximum amount. These minimums and maximums vary between insurers and can also be different depending on factors like your age and occupation.

  • Term life insurance. This policy usually pays out the amount you choose. The maximum amount available can depend on a range of different circumstances, including your income, your age, your occupation, the insurer and others.
  • TPD insurance. This generally works the same as term life insurance.
  • Trauma insurance. This generally works the same as term life insurance.
  • Income protection insurance. Income protection insurance often uses a benefit amount instead of a sum insured. The benefit amount is how much it pays per month. Your benefit amount might be set automatically, such as 75% of your average monthly income over the last 12 months, or you might be able to choose your own. When you choose your own, it generally cannot be more than 75%-85% of your average monthly income.

When you get TPD and trauma insurance as part of a bundled life insurance policy, you cannot generally choose a maximum sum insured more than your term life sum insured.

How much does life insurance cost?

Like other insurance, you pay for life insurance through ongoing fees known as premiums. Depending on the insurer, you might be able to pay your premiums once a year, twice a year, every month or sometimes every week. If you can, it is usually cheaper to pay premiums annually.

Life insurance policies are complex, and premiums are usually individual to you and your policy. In general, the quicker a policy is likely to pay out, the higher your premiums. For example, older people are generally more likely to get injured or die than a younger person, which means older people usually have higher life insurance premiums than younger people.

Some of the specific factors which are likely to affect your premiums include the following:

  • Your cover types. The more cover types you have with a bundled life insurance policy, the higher your premiums.
  • Your sum insured or benefit amount. The more a policy has to pay out, the higher your premiums.
  • Your health. Someone in poor health will usually have higher premiums than someone in good health.
  • Policy features. Special features, extra cover or optional additions can raise your premiums.
  • Your premium structure. Your premium structure refers to whether your life insurance policy has stepped premiums, level premiums or hybrid premiums.

Are there any other types of life insurance?

Usually, life insurance is either a standalone term life insurance policy or a bundled life insurance policy.

However, there are other types of insurance which can pay a lump sum if you die.

  • Funeral insurance. This type of insurance pays out in the event of death, much like term life insurance. The main difference is that funeral insurance is generally much cheaper and pays out a much smaller amount. Funeral insurance helps cover the cost of a funeral, while life insurance pays enough to take care of your family for years.
  • Other death benefits. Other types of insurance can also pay a lump sum if you die. For example, TPD insurance will often include death benefits. You might think of this as a TPD insurance policy that comes bundled with funeral insurance.

In general, life insurance can pay out in the event of death, serious injury, illness or disability as well as if you are unable to work. However, there are many differences between policies, which mean they can also pay out in other situations. For example, TPD insurance may provide death benefits, and income protection insurance may pay out if you are made redundant, rather than only paying out if you are unable to work.

Premium structures

It is important to pay attention to your life insurance premium structure because this can have a big effect on the costs.

  • Stepped premiums. With stepped premiums, the insurer updates your premiums once a year and increases them based on your current age. Generally, your premiums will increase significantly over time.
  • Level premiums. With level premiums, your premiums are not updated and will generally stay very similar over time. Your premiums depend on your age at the time you purchased the policy.

Some policies will let you choose whether you want stepped or level premiums, while others will only have one premium structure available.

Sometimes a policy can have a hybrid premium structure. This is when the same policy has both stepped and level premiums. For example, you might find a policy that has level premiums until you reach the age of 50 and then stepped premiums after that.

How do I apply for life insurance?

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

1. Go through an adviser.

Because it’s so complex, many people take out life insurance policies with the help of financial advisers or insurance brokers. In fact, some life insurance providers will only sell policies through advisers and refuse to sell directly to the public. 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 because the adviser’s fee is included in your premiums for as long as you hold the policy.

2. 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 be enough cover for you.

3. 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, including superannuation life insurance, 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.

How much life insurance will you need?

As everyone has their own unique circumstances, there is no one size fits all approach. However, there are a few ways that you can work out how much cover you need.

Take look at your lifestyle and financial needs

It's a good idea to consider:

  • Outstanding debts. How much debit you have left that would fall on your family?
  • Finances to fall back on. Do you already have any savings, assets or existing insurance that can help cover your families living expenses if you weren't around?
  • Your families living expenses. This can include food, rental and education costs.
  • How long do you want to be covered for. This ties in with the amount of finances you have to fall back on, the size of your family and their ability to generate income without you.

Speaking to an adviser

A qualified adviser can not only help you with how much you need, but can also guide you through the application process, and ensure that you know exactly what you are covered for.

Using a calculator

You can use our life insurance calculator to work out a rough a estimate of your cover needs. This help you when speaking to an adviser or applying directly with an insurer.

Get the right cover with an adviser

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Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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Rates last updated November 22nd, 2017
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$15,000,000
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Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™ .
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A simple life insurance product that can offer up to $1,500,000 in a lump sum payment on death or diagnosis of terminal illness.

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