What is life insurance?

While you might have some idea about what is meant by the term "life insurance", the truth is that life insurance is often used as a catch-all term for a range of protections including death cover, total permanent disability insurance (TPD), funeral insurance and income protection. And the fact that it's such a broad term creates some confusion about what's actually covered.

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 is right for you.

Video: Life insurance explained in 2 minutes

How does life insurance work in Australia?

In Australia, life insurance provides a lump sum financial benefit payment to nominated beneficiaries following the death of the person who is insured. Life insurance also can provide payments if become disabled, get seriously ill or suffer a serious accident, depending on the level of cover you take out.

• 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

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 payout any way you want.

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Name	Product	Maximum cover	Maximum Entry Age	Minimum Sum Insured	Cooling-off (days)	Expiry Age	Short Description
AAMI Life Insurance		$1,000,000	60	$100,000	30	99	Get life cover up to $1 million.	Get quoteMore info	Compare	loading Fetching your data...
NobleOak Life Insurance 2019 Winner		$15,000,000	69	$50,000	30	99	Get two months free when you combine life insurance with another type of cover. T&C’s apply. Ends 20 December 2019.	Get quoteMore info	Compare	loading Fetching your data...
Real Family Life Cover		$1,000,000	64	$100,000	30	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™.	Get quoteMore info	Compare	loading Fetching your data...
Virgin Life Insurance - Tailored Cover		$1,500,000	65	$3,000	30	80	Choice of cover options and flexible premiums to suit your budget. No lock-in contracts and fast application.	Get quoteMore info	Compare	loading Fetching your data...
ahm Life Insurance		$1,500,000	65	$100,000	30	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.	Get quoteMore info	Compare	loading Fetching your data...
Medibank Life Insurance		$1,500,000	65	$100,000	30	No expiry age as long as premiums are paid	Get a quote & you could win a $1,000 eftops Gift Card. Offer ends 19 January 2020. T&C's apply.	Get quoteMore info	Compare	loading Fetching your data...
nib Value Life Insurance		$1,000,000	65	$100,000	30	80	Receive one month's premiums off every year if you pay annually upfront. T&C’s apply.	Get quoteMore info	Compare	loading Fetching your data...
Zurich Ezicover Life Insurance		$1,500,000	69	$50,000	30	99	Receive a 10% discount on the second person when two applications are submitted at the same time, and both policies are issued.	Get quoteMore info	Compare	loading Fetching your data...
TAL Lifetime Protection Life Insurance		$2,000,000	74	$100,000	30	100	Get life cover up to $2 million.	Get quoteMore info	Compare	loading Fetching your data...
Insuranceline Life Cover		$1,500,000	65	$100,000	30	99	Take out a policy and get a $100 bonus gift after holding cover for 2 months. T&C's apply. Ends 31 March 2020.	Get quoteMore info	Compare	loading Fetching your data...
Guardian Life Insurance		$1,500,000	64	$100,000	30	No expiry age as long as premiums are paid	Cover up to $1.5 million with Guardian Life Insurance.	Get quoteMore info	Compare	loading Fetching your data...

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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

• 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.

• Why would I get bundled cover?

  A bundled life insurance policy is a good idea if you need more than one type of cover e.g. with term life insurance and TPD insurance.

  Let's say 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.

  Advantage of bundled cover

  • Less Maintenance: Give careful thought to how you manage your life insurance coverage. Let's say you have life insurance with one provider, health insurance with another, and so on, keeping track of your premiums would take a lot of effort on your part. You are also forced to maintain relationships with each. But having them under one cover and one underwriting saves you time and effort.
  • Less complicated and confusing: Let's say you have two different kinds of insurance underwritten by two different insurance companies. Placing a claim would require you to place a number of phone calls or schedule some meetings with two different insurers. However, if it is held by only one insurance company, any matter can be resolved with a single call.
  • Huge Discounts: If there is something very appealing when you package different insurance products, it is the huge discounts you can get. Life insurance providers usually reduce their rates when you allow them to underwrite multiple coverages. You might enjoy lower premiums when you consolidate life, health, or business insurance coverage.
  • Flexi-link: A recently introduced feature called flexi-link allows policies held inside of super to be combined with policies outside of super and vice versa, which provides greater flexibility for policyholders and can result in savings of up to 15-20% on premiums and policy fees.

  The disadvantage of bundled cover

  The main disadvantage is that there is only one sum insured for the entire policy.

• Why would I get standalone cover?

  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, work out what your cover needs are.

Packaging Options Available for Insurance Products

How you consolidate or package different insurance products would depend on different factors which include your needs, finances, and the risks you face. You can package two or more insurance products as your needs dictate. Some of the most popular combinations are:

Life Insurance and Income Protection

Having life insurance and income protection covers you for death, and at the same time, provides you with a stream of income when you become disabled due to injury or sickness. Life insurance pays your family a lump sum in the event of your death. The money can also be used to pay off additional medical and funeral expenses. It can also be used to pay off any financial obligations that have been incurred by the insured. Furthermore, it can also be used in planning your estate. Life insurance can help your family financially as they adjust to the new lifestyle. It also balances the emotional stress they feel because of the loss by not having to worry about the day-to-day expenses. Income protection, on the other hand, pays you up to 75% of your gross monthly income when you become unable to work due to disability or illness. It will provide you with a steady stream of income to help pay for medical and rehabilitation costs. Income protection also helps you pay daily expenses, such as food and bills. You can also use it to repay your debts or any mortgage payments. By taking care of these daily and common expenses, you are eased out of financial and emotional stress.

Life + Income Protection + Total and Permanent Disablement Insurance

In addition to the life and income protection insurance benefits, it can give you, adding Total and Permanent Disablement to your package can give you additional cover for sickness or injury that will deter you from ever working again. Total and Permanent Disablement Insurance pays you a lump sum in the event that you are unable to work or perform your duty related to your training, experience, and education. It also helps you pay expenses brought about by the disability, such as rehabilitation and nursing care costs. It can also give your income a boost when your spouse has to cut his or her working time to take care of you. It will enable you to maintain some semblance to your lifestyle before the injury or illness. Just think about the emotional and financial stress your disability could incur if you are unprepared for such things.

Life + Income Protection + Trauma Insurance

According to Heart Foundation statistics, there has been an increasing amount of Australians dying of heart disease, with one Australian dying of cardiovascular disease every 12 minutes. What would happen if you are suddenly diagnosed with a terminal illness or to suffer a stroke? Would your family be able to cope financially? Trauma or Critical Illness insurance pays a lump sum benefit if you are diagnosed with any critical illness included in the policy. This lump sum benefit could help you pay for medical expenses that you cannot otherwise afford. In addition, it helps you pay for medical equipment or rehabilitation costs you need while recovering from a disability.

Life + Income Protection + TPD + Trauma Insurance

There is likely to be no other cover you can get that will be as comprehensive as this. It covers you and your family thoroughly from any unfortunate events.

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.

• See the breakdown by product

  • 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.

• More types of life insurance products

  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.

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 payout, 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 payout, 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 payout 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 payout 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.

• Can I choose?

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

• How often will I have to pay 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.

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 debt 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 estimate of your cover needs. This can help you when you're speaking to an adviser or applying directly with an insurer.

Ready to look for cover? Follow these steps to compare

The purchase of adequate life insurance need not be as big a hassle as many people think it is. A key reason for Australia's current underinsurance crisis is that people simply feel overwhelmed by the different types of cover available.

1. Know why you need cover.
2. Consider each type of life insurance.
3. Consider your life stage.
4. Research what features matter to you.
5. Think of premium payments as a fixed expense.
6. Speak to a consultant if unsure.

Make an enquiry to compare life cover quotes

1. Know what you need your life insurance cover for

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). Consider these scenarios:

Some common expenses that life insurance can help cover include;

2. Consider the various types of cover

Life insurance helps your family once you die. There is a range of other situations that you might want to cover to e.g. becoming disabled. This is where "living insurance" comes in. The three main types of living insurance are

• Trauma insurance: Trauma insurance will provide a lump sum benefit payment if the policyholder suffers a medical condition covered under their policy. Some providers offer cover for up to 50 different conditions including stroke, cancer or heart attack. The lump-sum benefit can be used as the policyholder wishes but it is generally used to cover costs of medical treatment and ongoing living costs as they are forced out of work.
• TPD insurance: TPD insurance provides a lump sum or ongoing benefit if the insured suffers partial or total disablement and are unable to work to their full capacity or ever again. Each insurer will have different definitions for disablement so it is crucial that applicants are clear on when they will actually be eligible to claim.
• Income protection insurance: Income protection is generally purchased separately to life cover and provides an ongoing benefit of 75% of the insured's income if they are not able to work as a result of illness or injury. Income cover can offer a range of additional benefits to cover rehabilitation and nursing costs to ensure recovery is as swift as possible. Some policies will provide more than 75% of the insured's income if this additional amount is contributed to their superannuation.

• Looking to bundle cover?

  If you are considering bundling other types of insurance it is worth looking into the buyback feature. In most cases, if a benefit is paid for Trauma or TPD, the sum-insured for the life cover will be reduced by what is paid for the other type of cover. Buyback allows the policyholder to repurchase this amount of cover after a defined period of time to ensure they still have sufficient life cover in place.

Need help with steps 1 and 2? Use our needs tool below

3. Consider your life stage

You will need to review your life insurance regularly in order to make any alterations than may be needed following different life stages. Some typical events that may lead you to reassess the amount of cover you have in place include;

• Upgrade to a new home
• Change in occupation
• Birth of new child
• Death of beneficiary
• Remarriage

• More personal factors to consider

  Just like any major decisions, you will make for you and your family, choosing the right insurance policy needs a lot of consideration in order to get what you really need. Certain factors need to be considered and put to the test. Haste could lead to waste as the old maxim goes, so before grabbing the first policy offered to you, try to consider the following:

  • Your needs – What is right for you and your family? Think about the savings it can cost you before you go which type of insurance policy you would go for – term or whole life insurance. Determine which insurance need is the most important for you and your family at this point in life. It is wise to insure first the risk that you are more exposed to or more likely to create great damage when it occurs.
  • Your budget – After determining your needs, next is the budget. How much can you afford for insurance that will protect your future?
  • Your tax situation - If you belong under the high tax bracket, permanent insurance could be the best choice for you because the savings built up in the policy are tax-deferred. Within permanent insurance, the face value of your life insurance policy will be available to your family immediately after your death. With ordinary investments, your family may have to wait for the benefits or be forced to sell investments at a lower price.
  • Your agent – A good agent can help you bag some of the best deals in the market. Therefore, you need an agent you can trust. An agent who will take into account your present and future needs and how they play in the general scheme of things.

4. Think of the features that matter to you

What type of features do you need? This is important when speaking to an adviser or sorting through policies online. As a quick guide, think of what you need out of a policy:

• One that let's you increase your cover amount as you get older without an additional medical assessment? Check for 'Guaranteed future insurability'
• Flexibility to pause your premiums temporarily if you are struggling financially? Look for a 'Premium Freeze Feature'
• A benefit that helps your family out with the financial planning process when you're gone? Ask whether there is a 'Financial planning benefit'

Learn more about life insurance features

5. Look at your life insurance premiums as being a fixed expense in your budget that is not negotiable

Never consider your life insurance is an item that you can get rid off when money becomes tight because you believe you can take it out again when your cash flow improves. It will always be more expensive the older you get and you may also undergo some health problems as you age that may make insurance harder for you to obtain at the standard premium price.

You wouldn't drop your house insurance or motor car insurance to free up your household income, so why should you even consider dropping your life insurance cover?

6. Speak to an insurance consultant to help you find adequate cover

Speaking with an insurance adviser can help you find an insurance solution that closely matches your cover requirements. Insurance advisers can use their knowledge of the insurance market to;

• Help you compare multiple policy options at once
• Determine an adequate amount of cover
• Design your policy to include any other suitable cover options
• Find providers that will offer cover if you are potentially high risk
• Hunt out premium discounts

Common questions around how life insurance works

Payment and application

• How do I pay for my insurance?

  Payments can be made by direct debit, credit card or cheque to the insurer and most insurers will offer fortnightly, monthly, half-yearly or annual payment frequencies.

• How much life insurance cover do I need?

  This will vary significantly from person to person and is dependent on the number of financial dependents you have and what would need to be covered in the event of your serious illness, injury or death. Common expenses to cover include mortgage or rent repayments, ongoing living expenses, outstanding debts and education.

• Who receives the payment?

  This will depend on the type of insurance. Life cover will provide the payment to the policyholders nominated beneficiaries (or the policyholder if it has been paid under terminal illness). The benefit is generally paid to the policyholder for other types of cover who may then use it as they see fit.

• How much can I be insured for?

  The maximum sum-insured will vary between insurers with some limiting it to $1.5 million and others providing unlimited cover. Trauma insurance is generally limited to $2 million.

Cancellations

• What happens if I cancel my life insurance?

  If you decide to cancel your life insurance, the insurer will not refund any of the premiums paid. This is because life insurance and income protection remains in force and provides cover for the period of time that has been paid for. Most policies will offer a cooling-off period of about 30 days after the policy is activated where any premiums paid will be refunded if the person decides the policy is not for them.

• Can the life insurance company cancel my policy?

  Only you can cancel the policy. Life insurance companies can only cancel the policy if you do not pay your premiums or it is found that details provided in the application were fraudulent.

Other

• Can I take out life insurance for my wife or child?

  Most insurers will allow you to take out joint policies to cover your spouse and many will offer child cover options which enables you to insure your child for terminal illness or death to a maximum amount. There are some policies that will provide free child cover.

• Can I get a policy that will pay benefits after some time?

  There are no life insurance policies that offer a "guaranteed" payout at some point, as there's always the chance of cover lapsing or something else happening. Previously, return of premium (ROP) life insurance policies would return premiums paid after a certain amount of time if you survived the term, but these are no longer available in Australia, and often carried terms that meant they would not payout.

  Today, the closest thing to a "guaranteed" life insurance policy is one with no expiry age, meaning it will inevitably payout someday, provided your cover is still active and no exclusions apply. Typical life insurance policies will often expire around age 90 or 95, but it is possible to get funeral insurance policies that do not have an expiry age. To make sure it's value for money, you may want to look for policies that have specific value options to help ensure you get your money's worth, and don't have any set expiry age.