What is term life insurance?

What is term life insurance?

Term life insurance, also referred to as death cover, is a type of life insurance that provides a lump sum payment to your nominated beneficiaries (your spouse and children, for example) when you die or are diagnosed with a terminal illness.

It can help your loved ones to pay any debts that you may have together (such as a mortgage or car loan), and for parents it can help provide for the future needs of your children (such as schooling costs). It can also provide a lump sum of money that your partner could potentially invest to help provide for their future needs.

If you’re diagnosed with a terminal illness, a life insurance payout could help your family to cover the medical costs associated with hospital care or treatment. Use Canstar’s life insurance comparison tool to review a wide range of policies and compare your cover needs.

How does term life insurance work?

The name “term” life insurance refers to the fact that this kind of policy only provides coverage for a set period of time. If you pass away or develop a terminal illness within the covered term, you or the beneficiaries under the policy can make a claim and—if it’s approved—receive a benefit. But no benefit will be paid outside of the covered term.

This is in contrast to whole life insurance—a type of cover no longer sold in Australia—which came with a fixed premium and typically covered the policyholder for their entire life, so long as they continued to pay their premiums.

The Federal Government’s Moneysmart website points out accidental death insurance is different from term life cover. It will only pay out if you die from an accident and will not provide cover if you die from an illness, disease or suicide. This type of cover often has a lot of exclusions.

In short, the purpose of term life insurance is to help ensure that your family can still afford the lifestyle you planned to have, and to prevent financial troubles from compounding the emotional trauma of losing a loved one.

The potential benefits of term life insurance

Generally speaking, there are three main potential benefits of term life insurance:

• Increased financial security: If you have dependents it may help to protect them from financial difficulty that may arise from your passing

• Peace of mind: Knowing your dependents will have some cover to help them pay bills and other living expenses

• Flexibility: You can typically update your policy as you progress through different life stages.

When deciding if you need term life cover Moneysmart says it depends on if you have a partner or dependents. If you don’t have a partner, or people who depend on you financially, you may not need term life cover. But it says you might want to consider getting trauma insurance, income protection insurance or Total and Permanent Disability (TPD) insurance in case you get sick or injured.

How much does term life insurance cost?

The cost of life insurance depends on a variety of factors, including:

• Your age

• Your gender

• Your medical history (e.g. if you have any pre-existing medical conditions)

• The sum insured amount (the payout amount in the event of your death or terminal illness diagnosis)

• Whether or not you smoke. Smokers can expect to pay 110% more than an equivalent non-smoker for direct life insurance, based on data collected by Canstar Research as part of the Direct Life Insurance Awards

• Your current health status

• Your hobbies and lifestyle (for example, whether you participate in extreme sports or potentially life threatening activities).

Compare Life Insurance For Smokers

How much term life insurance do I need?

Whether you should take out a term life insurance policy and the amount of cover you should have (your “sum insured”) will depend upon your dependents and their needs and your financial situation.

In general, though, a life insurance policy’s benefit amount could be calculated in order to:

• Provide a lump sum to pay out all debts you owe (e.g. mortgage, car loan, credit cards etc.)

• Provide a lump sum for the beneficiary to invest for future income

• Provide a lump sum to cover any known, large future expenses (such as school fees or an adult child’s wedding).

While you may have life insurance provided through your super fund already, it may not necessarily provide enough cover, depending on your life stage and financial situation. This is why it’s important to compare your life insurance options, including a policy’s sum insured amount, premiums, term and coverage, before deciding on a policy. You can compare life insurance with Canstar.

It’s also important to read any relevant documentation, such as the Product Disclosure Statement (PDS) and Target Market Determination (TMD), for any policy you’re considering.

Do you need a medical exam to get term life insurance?

The question of whether you need to undergo a physical—or a medical exam—for life insurance is likely to come down to the provider you choose, and how strict their underwriting rules are. Some providers may require you to undergo a physical, and some may just require you to answer certain key questions about your medical history and your health.

It’s important to keep in mind, though, that the more risky an insurance provider considers you to be, the more they’re likely to charge you in premiums. Therefore, if a term life insurance policy doesn’t require you to take a medical exam before signing up, then it’s quite likely that the premiums will be more expensive than one that does.

What are the other types of life insurance?

The Australian Prudential Regulation Authority (APRA) separates life insurance into several different categories. Life insurance can refer to death cover, Total and Permanent Disability (TPD) cover, income protection insurance, disability income insurance (DII), trauma cover, consumer credit insurance (CCI), funeral insurance and accident insurance.

The most common types of life insurance you’re likely to be offered by providers are:

• Total and Permanent Disability (TPD) insurance: A form of cover that pays out a lump sum benefit if you were to become permanently disabled and are unlikely to ever return to your usual occupation or any other you’re qualified for. Cover may also be available through your superannuation fund.

• Income protection insurance: A form of cover that’s designed to supplement your income through a regular monthly benefit while you’re unable to work due to an illness or injury. Cover may also be available through your superannuation fund.

• Trauma insurance: If you suffer a serious injury or medical condition, trauma insurance will generally provide you with a lump sum amount.

• Accidental death insurance: Similar to term life insurance, accidental death insurance provides a lump sum amount but only when the cause of death is considered accidental.

Can I find out how providers handle life insurance claims and disputes?

As part of a world-leading joint project between APRA and the Australian Securities and Investments Commission (ASIC), publications and a comparison tool are available to help Australians compare life insurers’ performance in handling claims and disputes.

You can view claims and related dispute information, if this is of interest, by using the Moneysmart life insurance claims comparison tool.