With a life insurance policy, you can rest easy knowing that you or your loved ones could receive a lump sum payment if you become sick, injured, permanently disabled, are diagnosed with a critical illness or pass away.
We’ll take you through the different types of life insurance policies and how they work to help you choose the best life insurance for your circumstances.
What are the different types of life insurance?
While there may be other insurance options available in the market, here are some of the products you’ll commonly see offered by Australian life insurance companies.
In the event of your death or a terminal illness diagnosis, term life insurance could pay a lump sum to you or your beneficiaries. Term life insurance only covers you for a set period of time (e.g. until you turn 99 or a number of years).
A life insurance policy can insure not only your own life but also the lives of others. To insure someone other than yourself, you can take out a joint life insurance policy or an individual policy where you’re the policyholder, and the other party is the insured person. Typically, joint life insurance policies work on a first-death basis, meaning you only receive a payout for the first person who passes away. To take out an individual policy on someone other than yourself, you will need the other party’s informed consent and they may need to assist in the underwriting process. In some cases, you may also need to provide proof that the insured person’s death would financially impact you.
If you think your loved ones would struggle financially if you passed away, a term life insurance policy could be right for you. Depending on your policy, your death benefit amount may be in the millions, which could help your family manage your final expenses and give them time to grieve without worrying about money.
Commonly known as TPD insurance, this type of policy provides a lump sum if you’re unable to ever return to work due to a serious illness or injury that causes a total and permanent disability.
Whether you can make a claim on your TPD insurance may depend on your policy’s definition of disability. The two most common definitions are own occupation and any occupation. One allows you to claim if you’re unable to ever return to work in your usual occupation, the other if you’re unable to work in any reasonable alternate occupation based on your transferrable skills within your own education, training or experience. Your chosen definition will affect your total premium payments, limitations and more. For more information on these definitions, see our guide to own vs any occupation TPD policies.
When you make a TPD claim, you may have to complete a medical exam and show that you’ve undergone all reasonable treatment for your condition. It’s also worth noting that most TPD policies have an exclusion for self-inflicted injury.
Also known as critical illness cover, trauma insurance provides a payout if you’re injured or diagnosed with certain illnesses, such as cancer. Unlike TPD insurance, your ability to work won’t affect your claim on a trauma insurance policy.
This type of cover is useful for paying medical expenses that Medicare or private health insurance won’t cover. This could include the cost of travelling for treatment, accommodation near the hospital or modifying your home to be more accessible.
If you pass away, funeral insurance could pay a lump sum benefit to assist with your final expenses. Cover typically ranges from $5,000 to $15,000. One of the benefits of this type of cover is that it has a simpler underwriting process than term life insurance.
However, because there are generally no medical checks, the premiums may be higher as a result. In fact, you could end up paying more for less coverage than you would for a term life insurance policy.
Other factors that can affect your life insurance policy
Depending on your insurer, your policy and the type of life insurance you purchase, you may want to consider these other factors that could affect your cover and premiums:
- Stepped premiums versus level premiums. You might be able to choose between stepped and level premiums, which affect how your premiums are calculated and how much you’ll pay for your cover over the years.
- Linked and stand-alone cover. If you purchase multiple life insurance products, you can bundle them together with a linked policy or keep them as multiple stand-alone policies.
- Superannuation. You may already have life insurance through your super fund. Many funds offer income protection, term life or TPD insurance cover on an opt-out basis, with premiums deducted from your super contributions. It can be useful to understand the pros and cons of using your super fund for life insurance.
Comparing life insurance policies? We’re ready to help you
If you’re considering taking out life insurance, comparing policies is a great first step. We compare a number of policies from our partners, and in minutes you’ll be able to weigh up results through our free life insurance comparison service.
Want to purchase a policy from our partners? We’ll put you in touch with a specialist agent who can assist you through the rest of the process at no extra cost. Simples!
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.