When looking at ways to protect the value of your life, it is important to understand exactly what life insurance is and why it’s important, and how your life insurance policy can be affected by exclusions, premium loading, and indexing.
There are many reasons to get life insurance, but mainly it can allow your family to have enough funds to continue to afford their lifestyle if you’re no longer there.
Determining whether you need life insurance or income protection, and figuring out how much life insurance you will need is important. However, there are also many things that can directly affect your life insurance policy and premiums which you should understand and consider.
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these are standard conditions or specific cases based on your level of risk, which you can’t base your life insurance claim on.
an additional fee or increase in price of your standard life insurance premium, due to a higher likelihood of making a claim.
The amount that your benefit payout amounts are indexed (how much they increase or decrease) based on inflation rates.
‘Standard’ life insurance, which pays a lump sum to the person of your choosing in the event of death or diagnosis of terminal illness.
Covers your expenses with a lump sum payout if you are permanently disabled and are not able to resume work and make an income.
Also called ‘recovery insurance’, this pays a cash benefit if you are diagnosed with listed critical illnesses or injuries.
Provides continued income (a specific proportion, often up to 75% of monthly income) for a set period of time (e.g. for a year or two or until a certain age) to cover you in the event of an illness or injury that prevents you from working and earning an income.
Life insurance providers generally won’t cover suicide or self-harm if it occurs within 12-13 months of taking out a policy, but it is usually covered if it occurs after this period is over. Claims for self-inflicted injury are usually also excluded from total and permanent disability cover, trauma insurance, and income protection insurance.
If the insured has attempted or considered suicide, or experienced mental illness in the past, they will be assessed case-by-case to determine if the insurer will provide cover, and if so on what terms.
Life insurance providers often won’t cover death or injuries that are a result of anything illegal.
Life insurance providers may not cover you if your behaviour is deemed irresponsible, careless, or unacceptable by reasonable behaviour or by the policy’s standard. The policy’s PDS should outline what is seen as unwise and unsafe behaviour by the insurer. This exclusion can include (among other things):
Exclusions can include your participation in hobbies, activities, or pastimes in motorsports, water sports, extreme sports, dangerous combat sports, aviation, or outdoor pursuits that can be considered hazardous, dangerous, or risky, like:
|Extreme/combat sports||Skydiving||Hang gliding|
|Parachuting||Base jumping||Bungee jumping|
|Rock climbing||Abseiling||Mountain climbing|
|Extreme skiing/ snowboarding||Motorsports car/bike racing/rallying||Competitive go-karting|
|Scuba diving||Surfing||Jet skiing|
|Types of boating||Hot air ballooning||Hunting/shooting|
Your health can affect life insurance premiums and exclusions. Having an ongoing pre-existing medical condition, which is a condition or illness you have known about before you take out a life insurance policy (or having survived a serious illness which might recur) can result in your insurer excluding claims related to this condition.
Pre-existing medical conditions that may result in policy exclusions will usually include things like cancer, diabetes, epilepsy, heart disease, asthma, and obesity. However, different insurers will have various classifications for conditions.
Cancer, strokes, and heart attacks may have a 90-day qualifying period in respect of trauma policies (which means you can’t claim on these conditions within 90 days of purchasing the insurance). Post-natal depression is also usually excluded if the person isn’t incapacitated for over three months.
People with pre-existing medical conditions can still take out life insurance, although insurers may exclude claims pertaining to these specific conditions. Depending on the policy, insurers might include loading fees on premiums to cover the extra risk of pre-existing conditions, which may allow the person to make a related claim (usually with certain terms and conditions – refer to the policy’s PDS for more information).
Travelling to a country that is considered high-risk, or on a holiday that includes risky transportation or dangerous activities, will often result in an exclusion for claims related to the location, or the activity, or transportation.
Certain occupations or duties are considered high-risk and may result in exclusions (or will incur additional premiums) as they involve specific hazards that could be encountered. This may include:
While these are all generally considered a risk by life insurance standards, the particular matters the insurer will exclude may vary between different life insurance providers. Each insurer may categorise and penalise risky hobbies uniquely, which makes it even more important to compare life insurance policies to make sure you find the right one for your budget needs and lifestyle.
If you are serving in armed forces (Australian defence force) or any occupation in a war zone, and want a life insurance policy without war zone exclusions, you will need a specific Defence or Navy policy.
Having a pre-existing health condition is usually the most common reason you may incur a loading, because having past, current, or recurring health issues will increase your probability of claiming on your life insurance as a result of the condition.
You will be required to disclose and provide evidence of your pre-existing condition upon your life insurance application. Each insurer will have different classifications for pre-existing conditions, which can sometimes include:
Some insurers may refuse to cover you for certain conditions or may exclude claims related to the condition. However, if it is accepted, then you will usually be able to get cover with a loading that allows claims and payouts for this particular condition.
Loading fees for pre-existing conditions are generally scaled and can sometimes start at a 50% rate of the premium, and may increase at further 25% increments depending on the condition’s level of risk.
Having a high-risk job, occupation, travel plans, or lifestyle that includes regular high-risk activities or hobbies that aren’t already classified as exclusions are likely to incur a loading fee (the fee will vary between insurers and specific risk-assessment). This is because these factors increase your likelihood to make a related claim for injury or death.
Being a smoker or heavy drinker will generally incur a high loading fee on your life insurance premiums, as smoking and excessive drinking affects your health and can increase your probability of making a claim on your policy earlier than expected.
Because smokers are high-risk customers, they can sometimes be charged up to double the amount for life insurance premiums than non-smokers would. Quitting smoking and reducing (or stopping) alcohol consumption is a way to avoid loading fees on your life insurance premiums.
You can generally opt out or remove indexation or automatic CPI increases in your policy if you don’t think you require your sum insured to increase with changing prices. Avoiding inflation may also slow the rise in your life insurance premiums, however your payout amount also won’t increase with inflation. This means the relative value of the benefit may decrease over time, compared to the value it had when you first set up the policy.
In some cases a particular loading or exclusion can be reviewed by your life insurance provider if your circumstances, lifestyle, or level of risk has changed.
For example, your exclusions and loading may be able to be changed if, since your initial application: