What does life insurance cover?

Life insurance is a popular form of cover that can provide financial protection if the policyholder passes away or becomes seriously ill or injured. But the exact risks it covers generally depends on the type of policy you have, the provider you purchased it from, whether you hold the policy inside or outside of your super and your own circumstances

Let’s look at what is typically covered by the main types of policies that are usually grouped together as ‘life insurance’ in Australia, as well as some of the risks that are generally not covered.

While this guide is designed to help you understand what is generally covered by life insurance, it’s important to note that policies can vary from insurer to insurer. If you’re considering taking out a policy or reviewing existing cover, you should read the product disclosure statement (PDS), the target market determination (TMD) and other important documents carefully so you’re aware of what is and isn’t covered by your policy, what limits apply and whether it is suitable for you.

Death cover

What is death cover designed to cover?

Death cover, sometimes referred to as ‘term life insurance’ or simply ‘life insurance’, provides a lump sum payout to the policyholder or their beneficiaries (such as a family member) if the policyholder dies or is diagnosed with a terminal illness. In the case of a terminal illness, life insurance provider Real Insurance explains that a medical diagnosis of life expectancy of less than 12 months is usually required in order for a claim to be approved and a payout made.

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What does death cover not cover?

There are usually some types of risks that are excluded under death cover policies. For example, an insurer might specify that certain pre-existing conditions the policyholder has are not covered by the policy. In addition, death caused as a result of participating in a risky sport or activity may not be covered. Alternatively, an insurer may cover these risks but charge higher premiums if you have pre-existing conditions or enjoy risky hobbies.

Another common exclusion is death caused by suicide, if the death occurs within the first 13 months of your policy being purchased.

Total and permanent disability (TPD) insurance

What does TPD insurance cover?

A TPD insurance policy will make a payout following a claim if the policyholder becomes totally and permanently disabled because of an illness or injury and can no longer work. According to the Australian Government’s Moneysmart website, you may be able to take out a policy that pays out if you are no longer able to work in your occupation, while other policies would only pay out if you are no longer able to work in any suitable occupation. ‘Own occupation’ cover is generally more expensive and is usually only available in policies purchased outside of super, Moneysmart explains.

You can buy TPD insurance either as a standalone policy or packaged with death cover.

What does TPD insurance not cover?

A TPD insurance policy may not cover you if the claim relates to an illness that has been identified as a pre-existing condition and is listed as an exclusion on your policy, or an accident resulting from participating in a dangerous sport or activity. Injuries caused directly or indirectly by suicide or attempted suicide may also be excluded for the first 13 months after taking out or or increasing cover, according to insurer TAL.

TAL also explains that some TPD policies can be ‘accident only’, meaning claims relating to an illness are excluded, or ‘illness only’, excluding accident and injury-related claims.

Trauma insurance

What does trauma insurance cover?

Trauma insurance is designed to provide a financial benefit if the policyholder suffers a critical illness or is seriously injured. It can cover illnesses such as cancer, a heart condition or a stroke, or injuries such as major head trauma, according to Moneysmart. This type of cover is sometimes referred to as ‘critical illness cover’.

Insurer NobleOak explains that, unlike TPD insurance, trauma insurance provides cover regardless of whether or not you are able to work as a result of the illness or injury.

What does trauma insurance not cover?

Depending on the policy, pre-existing conditions listed on the policy may be excluded from cover, as well as injuries caused by self-harm or attempted suicide within 13 months of the policy being purchased.

In addition, Moneysmart explains that trauma insurance does not cover mental health conditions.

Income protection insurance

What does income protection cover?

Income protection insurance is designed to replace a portion of your income for a period of time if you become seriously ill or injured and cannot work. It can be used to cover regular expenses, such as your home loan repayments or other bills, while you are not earning an income. Unlike TPD insurance, an income protection benefit is usually paid as a regular amount for a period of time specified under the policy, as opposed to a lump sum.

What does income protection not cover?

Income protection generally does not provide cover if you lose your income because you have been made redundant or your employment has been terminated. Some insurers offer a separate form of cover called redundancy insurance to provide cover for people who experience job loss, but it is not as widely available as income protection cover. In addition, NobleOak explains that other exclusions can apply to income protection policies, such as injuries caused by acts of self-harm, being unable to work due to pregnancy or a mental health condition.

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Funeral insurance

What does funeral insurance cover?

Funeral insurance is designed to help cover the cost of funeral expenses, via a lump sum paid to the policyholder’s loved ones after they have died. The lump sum payout is usually capped at an amount stated in the policy.

What does funeral insurance not cover?

A notable exclusion with many funeral insurance policies is death caused by a terminal illness for the first few years of the policy (the exact duration of this exclusion can vary depending on the policy). In other words, only deaths caused by an accident would be covered by the policy initially.

What about life insurance within super?

Bear in mind that most types of life insurance, including death cover, TPD and income protection insurance, may be offered by super funds to their members, either by default to eligible members or on an opt-in basis. There are pros and cons to having insurance through your super – for example, it can be easier to manage and the premiums are often more affordable than standalone life insurance policies, but the costs can still reduce your retirement balance and the standard level of cover may not necessarily be sufficient for your needs.

Before purchasing, renewing or cancelling a life insurance policy, whether within or outside of your super, it could be a good idea to read the PDS, TMD and other policy documentation carefully, compare your options and seek financial advice from a qualified professional if you need it.

Cover image source: New Africa/Shutterstock.com