A beginners guide to life insurance

What on earth is life insurance?

You can get insurance for almost everything. You pay an ongoing fee, and then if what's insured is damaged or lost, your insurance can pay for it.

Life insurance is cover for a life itself. If you die or become terminally ill, then life insurance can pay a large amount of money to help out to your loved ones.

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Q. How does life insurance work in Australia?

In Australia, life Insurance provides a lump sum benefit payment to nominated beneficiaries following the death of the insured person. If the insured person is affected

  • The insured person is the person whose life is covered
  • A nominated beneficiary is the person that the insured decides is going to be paid out if they die or become terminally ill

Note: Life insurance also can provide payments if become disabled, get seriously ill or suffer a serious accident - which we'll discuss further in this article.

Q. What can the payment be used for?

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.

Want to compare life insurance policies?

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.

1. Standard life insurance

  • This is often called '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.

2. 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.

3. 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.

4. Income Protection Insurance

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.
  • 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.

To get the right type of insurance, work out what your cover needs are.

Two numbers to understand when getting a life insurance policy

  • 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?

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.

Many 'retail' policies have no limit on maximum amount of cover (as it's bought through an adviser). 'Direct policies' on the other have a maximum e.g. $15 million.

Compare maximum sum insured from these direct policies

Name Product Maximum cover Maximum Entry Age Minimum Sum Insured Guaranteed Future Insurability Expiry Age Short Description
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™.
Protect what matters with a new Virgin Life Insurance policy. If eligible, you can earn 25,000 Velocity Points. Ends 31 July 2019. Min $80/month, min. 6 month policy to earn Points.
Receive a 10% discount on the second person when two applications are submitted at the same time, and both policies are issued.
No expiry age as long as premiums are paid
Get life cover up to $1.5 million. Plus, Medibank health insurance members can save 10% off premiums.
Receive one month's premiums off every year if you pay annually upfront. T’s and C’s apply.
Get flexible life insurance up to the sum of $2,000,000.
Get a quote for up to $15 million in life insurance cover. Plus, get two months free when you combine life insurance with another type of cover. T’s and C’s apply. Ends 29 August 2019.
Get life cover up to $1 million.
No expiry age as long as premiums are paid
Cover up to $1.5 million with Guardian 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.

Compare up to 4 providers

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.

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.

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.

How you pay: 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.

Hybrid premium structures

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.

Is life insurance worth it?

Many people don't think it isn't worth getting life insurance so here's a little perspective.

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.

Common questions around how life insurance works

Payment and application



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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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