When you make a life insurance claim, you could receive a lump sum payment, provided you meet the requirements of your policy. However, your policy’s exact terms and conditions will vary based on a number of factors including the type of life insurance you choose and your insurance provider.
The most common types of cover you’ll see offered by Australian life insurance companies are:
- Term life insurance: Could provide your loved ones with a lump sum benefit if you pass away or are diagnosed with a terminal illness.
- Total and permanent disability (TPD) insurance: May pay out a lump sum to the insured person if they’re deemed totally or permanently disabled.
- Trauma or critical illness insurance: You might be able to claim on this policy if you suffer a specified critical illness or serious injury.
- Income protection can be another option to consider, which can be obtained in conjunction with these other types of lump sum insurance cover. If you are sick or injured and unable to work, you may be covered for a percentage of your income in monthly instalments. Check out our guide on income protection payouts here.
Your payout will also depend on if your policy is linked or stand-alone and if you take out life insurance cover through your superannuation.
Term life insurance
With a term life insurance policy, you may receive a lump sum benefit if you’re diagnosed with a terminal illness. Or, if you pass away, your chosen beneficiary (usually a family member) could receive your life insurance benefit instead.
Terminal illness payouts
Some life insurance companies will include terminal illness cover on their term life insurance policies. This means that if you’re diagnosed with a terminal illness and, in a doctor’s opinion, will pass away within a set period (usually 12 or 24 months), you could receive your sum insured (i.e. the amount you’ll be paid out) before you die. This payout can assist with the following:
- Accommodation near the hospital
- Palliative care
- Specialist treatments
- Transport to and from medical facilities.
This payout can also act as a cash buffer if someone in your family needs to take time off work to care for you. Alternatively, you could spend your payout making the most of your final years. This could be a long-awaited holiday, your dream car or even ticking something off your bucket list.
When you’re considering a life insurance policy, refer to the relevant Product Disclosure Statement (PDS) to see if you’ll be covered for terminal illness and what conditions you need to meet to make a claim.
Death benefit payouts
If the payout is due to the passing of the insured, there’s a slightly different process to go through. Typically, the policyholder’s beneficiary needs to call the insurer, and they will walk you through the steps. You will most likely need to fill out a claim form and provide them with:
- Medical records
- A copy of the death certificate
- Coroner’s report (if the cause of death is not listed on the death certificate)
- Proof of insurance and policy number.
Make sure you have copies of these original documents on hand when you make the call. If the claim is approved, the insurer may contact you to finalise the claims process.
Total permanent disability insurance
With TPD insurance, you can receive a payout if you meet your insurer’s definition of total or permanent disability. There are two main definitions available to you if you take out TPD insurance: an ‘own occupation’ policy or an ‘any occupation’ policy.
In short, an own occupation policy may pay out a benefit if you’re deemed unable or unlikely to return to work again in your regular occupation or chosen field of employment but could still work in a different occupation. This type of policy typically comes with a higher premium.
On the other hand, an any occupation policy may only pay out if you can’t or are unlikely to ever be able to work in any occupation you’re suited to by education, training or experience. This is the only option available if you take out TPD cover through your superannuation.
For more information on the differences between own and any occupation policies, see our guide here.
You can use your TPD insurance payout however you wish, although you might want to consider using it to fund your rehabilitation, pay any outstanding debts or maintain your family’s quality of life while you can’t work.
If you need to make a TPD insurance claim, you may need to provide your insurer with both your personal and medical details, as well as financial information relating to your previous employment.
Trauma or critical illness insurance
Trauma insurance payouts work similarly to term life insurance payouts. If you suffer from an injury or illness that’s covered on your policy, you go through your insurer’s claims process to receive a lump sum payment.
You will most likely need to provide your insurer with any medical records relating to the injury or illness you’re claiming for. Unlike TPD insurance, your injury or illness doesn’t need to impact your ability to earn an income for you to make a successful claim.
While you can take out a stand-alone trauma insurance policy, it can be bundled together with other types of cover like income protection or term life insurance. If you claim on a linked insurance policy, the amount you receive may be deducted from your total sum insured. For example, if your trauma insurance policy was linked to your term life insurance and you received a $100,000 trauma payout, your term life insurance sum insured may be reduced by that amount.
Since July 2014, these types of policies are no longer available through your superannuation. However, you may be able to link a trauma insurance policy from an insurance company with insurance held through your super.
Are life insurance payouts taxable in Australia?
Generally, trauma insurance, TPD and term life insurance benefits are tax-free when your policy isn’t through your super fund. If your policy pays out a death benefit to someone who isn’t a tax dependant (e.g. key persons insurance), they may have to pay tax on the payout.
When it comes to receiving a monthly benefit from an income protection policy, these payments are typically considered income and are taxable. However, you may be able to claim a tax deduction on your income protection premiums when you take out a policy outside of your super fund.
This is only general advice and doesn’t account for your personal needs and circumstances. For more information on how life insurance works with tax, refer to the Australian Taxation Office or seek tax advice from a specialist.
Does life insurance pay for suicidal death?
Death by suicide is a common exclusion among term life insurance policies. However, in many cases, it’s only excluded for a certain period of your policy (this varies by the policy) and some policies will exclude certain intentional acts such as death under the influence of alcohol or non-prescribed drugs). It’s unlikely you’ll be able to claim for a self-inflicted injury on a TPD, trauma insurance or income protection policy.
If you have attempted suicide in the past, this could be taken into consideration during the underwriting process. While you could still be covered, it might come with a loading or an exclusion for death by suicide. Suicide isn’t an easy subject to discuss, but it’s important that you’re completely honest with your insurer during the application process, as a failure to disclose could affect your ability to receive a payout if you make a claim.
How long do life insurance payouts take?
The time you’ll have to wait to receive your life insurance payout will depend on your circumstances, although you can generally expect your claim to be resolved within six months of notifying your insurer.1
According to the Australian Prudential Regulation Authority (APRA), these are the estimated average claims processing durations for each type of life insurance, from when the claim was reported to when it was finalised:1
|Insurance type||Average processing duration|
As you can see, TPD insurance has the longest claim processing time. This is due to the increased complexity of a TPD insurance claim. Conversely, death cover is the quickest, with 71% of claims being finalised within two weeks.1
For TPD insurance, you may also have to serve a waiting period, which is the amount of time you need to be ill or injured before your payout can be made. Once you’ve served this waiting period, your benefit may be paid out in arrears from the date you made your claim.
So, what’s next?
If you want the peace of mind that a life insurance policy offers, our free comparison tool lets you see policies from some of Australia’s trusted insurers side by side to compare their costs, exclusions, benefits and more.
You can also use our free life insurance calculator to help you decide on the right level of cover for you.
The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.