Types of Life Insurance in Australia

What is life insurance?

Life insurance is designed to help your loved ones financially by paying out a lump sum if you pass away. You can choose the amount of cover appropriate to your financial needs. This could help loved ones pay any remaining debts you may have together (such as a mortgage), and for parents it could help provide for your children’s future needs (such as schooling and university costs). It could also provide a lump sum of money that your spouse and/or family could potentially invest to help provide for their ongoing needs.

Most insurance providers will require you to complete an application, which typically includes questions about your medical history, lifestyle, occupation and hobbies. Additional medical requirements may also be necessary depending on your medical history and also the amount of cover you require.

Although life insurance is often thought of as a single product, it can come in several different forms of cover, such as term life insurance, income protection, Total and Permanent Disability (TPD) cover, trauma insurance and business expenses insurance.

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What is term life insurance?

Term life insurance is one of the most common types of life insurance. It provides a lump sum payment to your nominated beneficiaries (often your spouse, children or family, for example) when you pass away or are diagnosed with a terminal illness. If you’re diagnosed with a terminal illness, a life insurance payout could assist your family in covering the medical costs associated with hospital care and/or treatment.

What is income protection insurance?

As the name implies, income protection insurance may provide an income stream if you’re unable to work due to sickness or injury. These benefits are usually paid on a monthly basis until you can return to work, reach a certain age or for the agreed period of time under your policy – whichever is sooner.

Income protection benefits can cover up to 90% of your income in the first six months and up to 70% thereafter, if you become sick or injured. For salaried employees, your payouts will typically be calculated based on your pre-tax income, and for self-employed people they will be based on the net amount you earn after expenses have been deducted from your gross income.

The premium rates for this cover are also dependent on your occupation classification, as people with higher risk occupations will often have to pay a higher premium. Income protection typically won’t apply in the cases where other protections, such as worker’s compensation, apply. It’s also important to note that income protection is different to redundancy insurance, which offers limited financial protection in the case of involuntary redundancy.

Income protection can be important for some people, especially those in labour-intensive or high risk occupations, as well as contractors, as it can help ensure that ongoing financial commitments such as mortgage or rental payments and household bills can be paid while you’re unable to work.

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What is Total and Permanent Disability (TPD) insurance?

TPD insurance pays a lump sum in the event that a severe sickness or permanent injury prevents you from ever working again. There are two common definitions of TPD, and some providers may let you choose which one you would like to use when you take out your policy:

1. Any Occupation: where you are unable to engage in any paid work for which you are reasonably qualified by education, training or experience ever again; or
2. Own Occupation: where you are unable to engage in your usual occupation ever again.

You can apply for TPD cover either on a ‘standalone’ basis or alternatively you can add it to a relevant life insurance policy. A TPD insurance claim payment may be able to replace lost income, clear your debts and help with any modifications to your home that you require due to your particular medical condition.

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What is trauma insurance?

Trauma insurance is sometimes referred to as ‘critical illness’ cover, or ‘recovery insurance’. It’s designed to payout a lump sum which may cover your medical treatment expenses that are not covered under Medicare or private health insurance, if you were to suffer one of the listed serious medical conditions. It may also cover rehabilitation, lifestyle change and living expenses, as well as help cover the cost of repaying debts such as a home loan or credit card. This cover normally includes a range of major medical conditions such as heart attack, stroke, cancer and coronary artery bypass surgery.

What is business expenses insurance?

Business expenses insurance enables business owners to insure the ongoing, fixed costs of their business in the event of their serious illness or injury. This cover may also ensure the business remains viable while the owner is recovering. This type of insurance is usually only available to small businesses with fewer than five income-producing employees.

Depending on the policy, the business expenses that may be covered include:

• Office space rental fees.

• Leases and loans on cars, equipment or machinery.

• Insurance and security costs.

• Utility bills.

• The salaries of non-income producing staff.

• Other general business expenses.

There are two other types of business life insurance, which can be taken out as a package or bought separately:

• Key Person Insurance: provides a stream of income to help cover the loss of revenue in the event that a key staff member (who is relied on to make money) passes away or becomes disabled.

• Business Partner Insurance (Buy/Sell Insurance): provides a lump sum payout so a business partner can buy out another partner’s share in the business when said partner passes away or becomes disabled.

Self Managed Super Fund (SMSF) Insurance

Some insurance providers may also let you establish life and TPD insurance cover under a Self Managed Super Fund facility.

What factors affect life insurance quotes?

Life insurance providers assess your details when determining your premiums and what types of life insurance they can offer you. This process usually includes:

• The completion of a full application on your part, where you provide your medical history, occupation, regular activities (like sports or other potentially risky hobbies) and basic financial (income) details.

• Supply medical reports, such as medical exams and blood tests in some instances, and additional financial information, which may also be necessary if you request a large amount of cover.

Each person is then assessed on an individual basis, with premiums varying when medical conditions or regular activities fall outside the mainstream guidelines.

If you already have a form of life insurance and are considering your cover, or if you’re looking to become a first-time policyholder, it may be beneficial to compare providers to help ensure you’re getting cover that’s suited to your needs, as well as value for your money. It’s important to read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) carefully to check what cover is included and what exclusions might apply to any policy you’re considering.

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