What Is Life Insurance?
Find out what life insurance is and how it works with Savvy today before buying your policy.
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Life insurance is an important financial product which can provide some much-needed financial security to you and your loved ones in the event of your death, disablement, illness or injury. However, before you purchase your policy, it’s important to have a clear understanding of what life insurance is and how it works.
You can find out all the ins and outs of life insurance in one place in Savvy's helpful guide. Learn about the different types of policy available to you as a buyer and the best ways to compare policies available on the market.
What is a life insurance policy and how do they work in Australia?
A life insurance policy is a contract between a policyholder and an insurance company in which the insurer agrees to pay out a sum of money upon the death, disablement, illness or injury of the policyholder (depending on the type of policy) in exchange for regular premium payments. Premiums are usually paid either monthly or annually.
Upon a successful claim being made, the sum insured is typically paid out to the policyholder's beneficiaries, such as their spouse or children, and is intended to provide financial security and support should they pass away or no longer be able to contribute to household income.
Overall, life insurance policies can provide valuable financial protection for you and your loved ones, helping to ensure that your beneficiaries are taken care of should a covered event take place.
What are the different types of life insurance in Australia?
There are several different types of life insurance to choose from when comparing your options on the market. These are:
Life cover
Life cover, also known as term life insurance or death cover, is a type of insurance policy which can pay out a lump sum to your nominated beneficiaries in the event of your death or diagnosis of a terminal illness. This payout can be used to cover expenses such as funeral costs, debts and ongoing living expenses.
This type of cover comes without a set maximum payout, so you can choose whatever covered amount is appropriate for you, your family and your budget. The policy also typically has a fixed term length, usually ten to 30 years.
Income protection insurance
Income protection insurance is a type of policy which can provide a regular ongoing payment to replace some of your income if you’re temporarily unable to work due to an illness or injury. In Australia, income protection insurance is designed to cover up to 70% of your pre-tax income, with benefits paid monthly.
The policy will typically have a waiting period of between two weeks and two years before payments start and a benefit period of up to five years or until you reach the age of 65 (depending on your insurer’s terms and conditions).
Total and permanent disability (TPD) insurance
TPD insurance is a type of insurance policy which can provide a lump sum payment if the insured person becomes totally and permanently disabled and is unable to return to work. Under this policy, you can choose to insure yourself for a sum of up to $3 million to $5 million (subject to your insurer’s terms and conditions).
In Australia, there are two main types of TPD insurance: Any Occupation and Own Occupation. Any Occupation policies can only pay out if the insured is unable to perform any occupation for which they are reasonably suited based on their education, training, and experience. Own Occupation policies, on the other hand, can pay out if the insured is unable to return to their current position, regardless of whether they can work in a different occupation.
Trauma insurance
Trauma insurance, also known as critical illness insurance, is a type of insurance which can pay a lump sum benefit in the event you suffer a serious medical condition or illness, such as cancer, heart attack, stroke or major head trauma. This benefit can be paid out regardless of whether you’re able to return to work and can be used to cover medical expenses, ongoing treatment costs or any other financial needs that may arise as a result of your illness.
Trauma insurance can provide financial security during a difficult time, allowing you to focus on your recovery without having to worry about the financial impact of your illness. It may be able to offer payouts as high as $2 million with some insurers.
The amount of cover and the conditions covered by each policy can vary depending on the insurer and policy, so it’s important to carefully read and understand the policy terms and conditions before signing up.
How do I compare life insurance to help me find the best for my needs?
There are many areas to consider when comparing life insurance policies to help you determine which is the best for your situation. These include:
- Premium cost: premiums are the regular payments you make to the insurance company to keep your policy active. When comparing policies, it's important to consider the cost of premiums and how they fit into your budget.
- Coverage limit: it’s crucial to choose a policy with a coverage limit which is sufficient to cover your loved ones' needs in case you pass away. This can include expenses such as funeral costs, outstanding debts and ongoing living expenses.
- Inclusions: beyond their coverage in relation to death, injury and illness, it’s worth looking for policies with inclusions which may be useful for you, such as funeral advancement cover, worldwide coverage and inflation-proofing.
- Exclusions: policies will also come with a range of exclusions, such as suicide (within the first 13 months), criminal activity and alcohol or drug use. Participation in risky sports such as paragliding may also be excluded. When comparing policies, it's important to consider the exclusions and ensure you understand them fully.
- Policy riders: riders are additional benefits which can be added to your policy to provide extra coverage (typically for an added cost). For example, some insurers may offer policy riders for accidental death or insurance cover for your child. Consider whether they align with your needs before adding them to your policy.
- Waiting periods: waiting periods refer to the length of time you must wait before making a claim on your policy. When comparing policies, it's important to consider the waiting periods and whether they align with your needs. Income protection may have waiting periods of between two weeks and two years, as mentioned, while trauma and TPD cover may come with 90-day waiting periods.
- Special deals: in some cases, life insurers may offer special deals such as discounts or free gifts as an incentive to sign up for coverage. However, it’s important to assess whether the policy is right for you beyond this incentive.
How much does life insurance cost?
Age
Life insurance premiums are generally lower for younger individuals because they’re considered to be a lower risk of making a claim. As you age, the cost of life insurance increases as the likelihood of death also increases.
Health and lifestyle
Life insurance companies consider your health and lifestyle when calculating your premiums. If you have a pre-existing medical condition or engage in risky activities, your premiums will likely be higher, as these factors increase the likelihood of illness, injury or death. Additionally, those who are overweight or have high blood pressure may pay more for their insurance for the same reason.
Coverage amount
The amount of coverage you choose will also affect the cost of your life insurance premiums. The higher the coverage amount, the higher the premiums.
Family medical history
If your family has a history of illness, your premiums may be impacted, regardless of whether you actually have that condition at the time of your policy purchase.
Occupation
Certain occupations are considered higher risk than others, which can impact the cost of life insurance premiums. For example, someone who works in a higher-risk job such as a truck driver may have higher premiums than someone with an office job.
Smoking status
Smokers generally have higher life insurance premiums than non-smokers due to the increased risk of health complications associated with smoking.
The pros and cons of life insurance
PROS
Financial security and peace of mind
The primary benefit of life insurance is that it provides financial security to your family in case of a covered illness, injury or death. The payout from your policy can cover immediate expenses like funeral costs, as well as ongoing expenses like mortgage payments and household bills.
Can help clear your debts
If you’re unable to work and earn income due to unforeseen circumstances, your life insurance policy can help you pay off existing debts, such as mortgages, credit card bills and other financial obligations. This can relieve the financial burden on you and your family during a difficult time.
More affordable premiums for younger people
If you’re under 40, you may be able to get a life insurance policy at a lower cost than older individuals. This is because younger people are often considered lower risk and can get more affordable premiums.
Tax-free payouts to dependents
In Australia, payouts from life insurance policies to your dependents are typically tax-free. This means that your loved ones may not have to pay income tax on the lump sum they receive from your policy, providing them with greater financial stability.
CONS
Can be expensive
The cost of life insurance can add up, especially if you’re paying premiums for many years before making a claim. This may put a strain on your budget.
Complex claims process
Life insurance claims can be complex and time-consuming, particularly if the cause of death is unclear or the medical conditions fall outside the policy’s coverage. However, any inclusions or exclusions will be determined at the point of purchase, so you should be aware of what is and isn’t covered.
May not qualify
You may need to undergo a medical exam to qualify for life insurance which involves providing blood and urine samples. If you don’t meet the underwriting standards of the insurance company, your application may be denied or delayed, although not all policies require a medical exam.
Frequently asked questions about life insurance and how it works
Helpful life insurance guides
Compare life insurance policies side-by-side
Disclaimer:
Savvy is partnered with Compare Club Australia Pty Ltd (AFS representative number 001279036) of Alternative Media Pty Ltd (AFS License number 486326) to provide readers with a variety of life insurance policies to compare. Savvy earns a commission from Compare Club each time a customer buys a life insurance policy via our website. We don’t arrange for products to be purchased from these brands directly, as all purchases are conducted via Compare Club.
Savvy does not compare all life insurance policies or providers currently operating in the market. Any advice presented above or on other pages is general in nature and doesn’t consider your personal or business objectives, needs or finances. It’s always important to consider whether advice is suitable for you before purchasing an insurance policy.
For any further information on the variety of insurers compared by Compare Club or how their business works, you can read their Financial Services Guide.