What is life insurance, and is it important?
What is the purpose of life insurance?
Life insurance can help provide financial peace of mind if you die or suffer a serious injury or illness. It provides you or your chosen beneficiary financial assistance, either through a lump sum payout or monthly payments, if the claim is payable.
Life insurance may assist in covering financial obligations such as mortgage repayments, everyday living expenses, funeral costs, children’s education fees and debts.
What are my options with life insurance?
There are three main types of life insurance cover, and a suitable option depends entirely on your circumstances and needs.
Term life insurance
Term life insurance, otherwise known as ‘death cover’, pays a set lump sum when you pass away or are diagnosed with a terminal illness and have less than 12 or 24 months to live, depending on the insurer. The sum of money goes to you or the people nominated as your beneficiaries on your policy.
Total and permanent disability cover (TPD)
TPD insurance can be taken out in conjunction with a life insurance policy, or as an individual product. This cover pays a lump sum in the case of serious injury or illness resulting in permanent disablement. This money is designed to support you with rehabilitation and living costs if you cannot return to work.
Trauma cover
If you’re diagnosed with a serious illness or injury, such as cancer, heart disease, stroke or other life-threatening conditions, trauma cover can help. Also known as ‘critical illness cover’, trauma insurance pays a lump sum if you experience a major medical incident as defined by your policy.
Income protection
An income protection policy can pay out up to 70% of your income in monthly instalments if you can’t work due to illness or injury, subject to conditions of the policy. Waiting periods apply before income protection payments commence. This type of cover may help you and your family stay afloat financially if something happened that prevented you from working or you’re only able to work in a reduced capacity.
Premiums paid for income protection outside of superannuation are typically tax deductible in the year they’re paid. Also, any benefits paid are assessed as income, meaning they can be taxed just like your regular income.
You might find that you need some or all of these insurances. To learn more about how these insurances could protect you and your family, get in touch with an expert.
Life and TPD insurance through super
The 2 common avenues to choose from to take out life and TPD insurance are either directly with the insurer or through your superannuation fund. We explain both options, along with pros and cons, in our guide to life insurance through super.
Generally, getting life insurance through your super fund is a simpler process, with some funds providing default cover when you become a member of the fund and meet their eligibility requirements. However, you may have a maximum level of cover available and less flexibility in your cover options. Keep in mind also that the premiums for life insurance through your super fund are deducted from your super account, which could reduce your total retirement savings.
Income protection through super
You may also be able to take out income protection through your superannuation fund. This insurance is often referred to as Salary Continuance through super. There tend to be more restrictions for Income Protection policies held through super, so it’s important you read the Product Disclosure Statement to understand what you’re covered for. Premiums paid through super are not tax deductible to you personally. Our guide provides more information about getting income protection through your super fund.
What affects my life insurance premiums?
Similar to other kinds of insurance, life insurance premiums can vary depending on the type of cover, the insurance provider and your specific circumstances (e.g. age and health).
Some important factors to consider when calculating the average cost of life insurance are:
- Type of cover: The more comprehensive the level of cover is, the higher the premiums will be.
- Health and lifestyle: Your medical history and lifestyle are major contributing factors to the premiums you’ll pay, depending on what product you are interested in. Premiums can be influenced by other factors including smoking, alcohol consumption and body mass index (BMI).
- Occupation: If you work in an occupation where you’re faced with regular dangers and hazards (like the operation of heavy machinery and drilling equipment), you may end up paying a higher premium.
- Age: Your age may contribute to the cost of your premium; older people may have a higher likelihood of needing to claim than younger people.
- Policy features: Extra cover, special conditions and optional features may add to the cost of your premium.
- Sum insured or benefit amount: The amount of money you choose for your insurer to pay out once you claim will impact your premium’s price.
Life insurance exclusions to look out for
Similar to other insurance policies, it’s important to understand the exclusions and restrictions relevant to your cover. Most insurers have general exclusions in place for every type of life insurance cover they offer, and these exclusions or restrictions form part of their policies regardless of your medical history, financial circumstances, health and wellbeing.
Some common general exclusions include:
- Criminal activity/breaking the law: Injuries and death as a result of engaging in criminal or illegal activity can void your cover.
- Suicide or self-harm: Many insurers have specific clauses in their policies that withhold paid benefits in claims involving suicide or attempted suicide. Depending on your insurer and your policy’s terms and conditions, a death benefit may not be paid within the first 13 months of taking out, or increasing cover.
Your insurer will consider your circumstances in the application process (if your insurance is underwritten) to determine if you are eligible for cover (this includes any pre-existing conditions you may have). You should always read the Product Disclosure Statement (PDS) to ensure you’re fully aware of the policy’s conditions and any exclusions and restrictions that may apply.
If you have a pre-existing medical condition, be sure to disclose any information about your medical circumstances to your insurer.
More information about life insurance
How does life insurance work for couples?
If you and your partner both want to take out life insurance, there are several options available to you. Depending on your circumstances, you may want either a joint life insurance policy or two separate single life insurance policies.
With two separate single life insurance policies, your beneficiaries could get a payout when each policyholder passes away. Therefore, if someone is a beneficiary in both policies, they’ll receive two payouts. You may also have greater flexibility and customisation with this option, although it could also cost you more in premiums.
Do I still need a will if I have life insurance?
Even if you have life insurance to cover your loved ones financially, a will can still provide certainty when you pass. Insurance benefits can be paid to nominated beneficiaries when the policyholder dies, however, a will plays an important role in organising your estate if you do not have a nominated beneficiary.
Your will outlines how your assets and property will be distributed. It also acts as an opportunity to decide how you want to arrange things like funeral instructions, how your valuables are divided and even who will be the guardian of your children after your death.
For more information on writing your will, refer to our will preparation guide.
How much life insurance do I need?
A suitable level and type of cover for you will depend on factors like your current savings, debts and investments, your family’s average cost of living and the amount of superannuation you’ve accrued.
We can help you estimate an appropriate level of cover with our free life insurance calculator.
Meet our life insurance expert, Steven Spicer
As the Executive General Manager of Health, Life and Energy, Steven Spicer is a strong believer in the benefits of private cover and knows just how valuable the peace of mind that comes with cover can be. He is passionate about demystifying the health insurance industry and advocates for the benefits of comparison when it comes to saving money on your premiums.