
Types of life insurance in Australia
Learn the types of cover available and what's right for you
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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.
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.
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.
This is guide explains how life insurance works and some of the differences you might find between 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.
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.
To get the right type of insurance, work out what your cover needs are.
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:
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.
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.
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.
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.
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.
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.
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:
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.
It is important to pay attention to your life insurance premium structure because this can have a big effect on the costs.
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.
Many people don't think it isn't worth getting life insurance so here's a little perspective.
Generally, there are three different ways to purchase life insurance:
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.
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.
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.
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.
It's a good idea to consider:
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.
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.
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.
Make an enquiry to compare life cover quotes
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;
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
Answer two quick questions to work out the type of cover you need.
Question 1 of 2
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;
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:
Learn more about life insurance features
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?
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;
Learn the types of cover available and what's right for you
You could be missing out on additional super returns.
It depends on your circumstances.
What's the average cost in Australia?