What is Life Insurance?

How does life insurance work?

Life insurance provides you, your family and loved ones, with financial security if you were to pass away, become terminally ill, or become unable to work (in some cases). Depending on your policy, life insurance can pay a benefit for death, disability or being diagnosed with a specified illness.

What are the different types of life insurance?

Life insurance includes multiple different types of cover, which can be bought separately or bundled into one policy. These include term life insurance, trauma insurance cover, total and permanent disability (TPD) cover, and income protection insurance. You may require one or more of these types of cover, depending on your circumstances.

Term life insurance

Term life insurance is what we usually mean when we talk about life insurance. It provides a lump sum payment to you or your beneficiaries when you pass away or are diagnosed with a terminal illness that will end in death within a specified period – usually 12 or 24 months. Term life insurance can help your dependents pay out any debts that you may have, as well as help to provide for their future needs. It can also provide a lump sum of money that your partner can potentially invest and gain an income from.

Trauma insurance cover

Trauma insurance can provide a lump sum of money to help you meet medical expenses and other financial needs when you have suffered medical trauma. While the type of medical trauma covered will differ between policies, some of the more commonly defined events are cancer, heart attack and stroke.

Total and permanent disability cover

Total and permanent disability (TPD) cover pays you a lump sum if you become totally and permanently disabled. This could help you partially or fully cover your costs of rehabilitation and support you financially with making debt repayments. It may also help subsidise your future costs of living.

The definition of total and permanent disability varies between insurance companies, but it generally means that you are disabled to the extent that you will probably be unable to work again. As ASIC’s Moneysmart website explains, this can be defined as being unable to work in your own current occupation, or unable to work in any occupation again.

Income protection insurance

Income protection insurance pays you a benefit if you are unable to work for a certain period of time because of illness or injury. This is generally paid monthly, but can be paid as a lump sum in certain circumstances.

Policies will insure you for a set percentage of your current regular income (commonly up to 75% of your gross salary) for up to a certain duration known as the benefit period. In the event of a successful claim, you may need to wait for your income protection insurance to ‘kick in’ after a certain waiting period specified in the policy. After the waiting period, the policy should pay you the agreed amount until you are able to return to work, or the agreed period of time (which is generally a certain number of years or until you reach a certain age) – whichever is sooner.

How much life insurance do I need?

The level of life insurance cover you will need depends on your individual circumstances, your life stage and the type of insurance you are considering.

In order to work out how much cover you should take out, you should consider how much your family would need and how much they would receive. The amount they would need could include expenses such as paying off your mortgage and other debts, as well as general living expenses such as childcare and education. The amount they receive may come from your superannuation, shares, savings and existing insurance policies and any paid leave you have.

You may also wish to consider whether other members of your family could provide any support, and if so what type of support they can offer. For example, family members may be able to help in caring for your children if you have any, and this could help towards alleviating childcare expenses, for example. Moneysmart also suggests that you check whether you already have life insurance through your super fund.

You can use Canstar’s life insurance calculators to help you estimate your life insurance needs and the cover you may be eligible for:

1. Life Insurance Needs Calculator. This calculator can help you work out an estimate of how much insurance and income protection cover you may need.
2. Income Protection Insurance Calculator. This calculator can help you work out an estimate of how much cover you may want to apply for, in case you were to become unable to work due to illness or injury.

How much does life insurance cost?

The cost of life insurance may vary depending on a number of factors including your age, gender and whether or not you smoke. You may need to ask a financial adviser or trusted professional about how you can get the right life insurance coverage for your situation and your budget.

It’s important to note that price isn’t everything when it comes to choosing a life insurance policy. It’s a good idea to also take into account the level of cover you are getting and any exclusions that may apply. If it looks like you may be paying too much for your life insurance, or you think you’re not getting enough coverage for your premiums, it may be time to shop around.

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