Learn the types of cover available and what's right for you
What is life insurance?
A beginners guide to how life insurance works in Australia.
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.
How can this guide help?
This is guide explains how life insurance works and some of the differences you might find between different kinds of life insurance.
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.
- 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.
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.
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.
Is life insurance worth it?
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:
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.
- Know why you need cover.
- Consider each type of life insurance.
- Consider your life stage.
- Research what features matter to you.
- Think of premium payments as a fixed expense.
- Speak to a consultant if unsure.
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:
- If you are single, the cover you need will be sufficient to pay your bills, any outstanding mortgage debt, personal debt and coverage for your funeral costs.
- If you are married and have children, you will need extra cover and at this point of time, you may have accumulated larger debts, either short-term or long-term.
- If you are the main income earner of the family, you will need to consider your families ongoing expenses.
Some common expenses that life insurance can help cover include;
- Mortgage debt
- Other personal debt - car loan, personal loan
- Legal expenses that may arise following death
- Funeral expenses
- Education expenses
- Home duties that policyholder managed
- Everyday living expenses - food, clothing, transport, maintenance, entertainment
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.
Need help with steps 1 and 2? Use our needs tool below
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Answer two quick questions to work out the type of cover you need.
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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
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'
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
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