What is term life insurance?

You may think that the concept of ‘life insurance’ is straightforward, but in fact, the definition can vary in Australia, with the Australian Prudential Regulation Authority (APRA) laying out several categories. Life insurance can refer to death cover, total and permanent disability (TPD) cover, disability income insurance (DII), trauma cover, consumer credit insurance (CCI), funeral insurance and accident insurance.

While there are many different types of life insurance, this article focuses specifically on death cover, which is also known as term life insurance. To find out more about getting term life insurance and to compare your options, you can read our annual Life Insurance Star Ratings report. You may also like to compare life insurance options, including the possibility of multiple types of cover and discounts with Canstar.

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What is term life insurance?

Term life insurance 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), and for parents it can help provide for the future needs of your children (such as schooling costs, which can be considerable). 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.

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 term.

If you die 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 Australian Government’s Moneysmart website points out accidental death insurance is different from life cover.

It will only pay out if you die from an accident. It 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

According to Suncorp 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
• Peace of mind – knowing your dependents will have some cover to help them pay bills and other living expenses
• Flexibility – you can update your policy as you progress through life’s milestones.

When deciding if you need life cover Moneysmart says it depends 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 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.

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

As part of a world-leading joint project between the Australian Prudential Regulation Authority (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, in Moneysmart life insurance claims comparison tool.

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 both your family and 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).
• 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 through your super fund, that may not necessarily provide enough cover, depending on your life stage and financial situation.

How much does term life insurance cost?

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

• Your age
• Whether you’re lame or female
• Your medical history
• The sum insured (the payout amount in the event of your death)
• Whether or not you smoke
• Your current health status
• Your hobbies and lifestyle (for example, whether you participate in extreme sports)

Smokers can expect to pay 81% more than an equivalent non-smoker for direct life insurance, and 26% more than an equivalent non-smoker for direct income protection insurance, based on averages with recent Canstar research, for example.

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 are likely to charge in premiums. Therefore, if a term life insurance policy does not 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.

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