What is life insurance?

What is life insurance and why might you need it? We give a brief overview of the types of life insurance available in Australia and why it can be a handy thing to have.

What is life insurance?

The purpose of life insurance is to provide you and your family with financial security if you were to pass away, become terminally ill, or in some cases if you become unable to work. Depending on your policy, life insurance can pay a benefit in events such as your death, disability or upon being diagnosed with a specified illness. 

Life insurance includes multiple different types of cover, which can be bought separately or bundled into one policy. You may require one or more of these types of cover, depending on your circumstances:

  • Life cover: also known as ‘term life insurance’ or ‘death cover’, pays a lump sum to your nominated beneficiaries (such as your partner or family members) in the event of your death, or if you are diagnosed with a terminal illness.
  • Trauma insurance cover: also known as ‘critical illness cover’, provides a lump sum of money if you are diagnosed with a specified illness, for example cancer, heart attack or a stroke. 
  • Total and Permanent Disability (TPD) cover: provides a lump sum payment if you become totally and permanently disabled and are no longer able to work.
  • Income protection insurance: provides a benefit, usually paid monthly, to help replace a portion of your income if you are unable to work due to serious illness or injury.

If you’re comparing life insurance policies, the comparison table below displays some of the policies currently available on Canstar’s database for a 30-39 year old non-smoking male working in a professional occupation. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical) and features links direct to the provider’s website. Use Canstar’s life insurance comparison selector to view a wider range of policies.

Why might you need life insurance?

Life insurance can provide financial peace of mind that you and your family would be covered for some of the major expenses of life if something were to happen to you. This may include full-time child care, education or living expenses, among other things.

As discussed above, there are multiple types of cover that fall under the life insurance “suite” of products. Each type of insurance can provide a certain benefit payment to help you and your family after different types of life events, such as death, critical illness, disability, or serious injury.

Here’s a quick snapshot of each of these products.

What is 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 (your family or other loved ones you specify in your policy) when you die 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 (such as your spouse and/or children) 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.

What is 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 a medical trauma.

While the type of medical traumas covered will differ between policies, some of the more commonly-defined events are cancer, heart attack and stroke.

What is Total and Permanent Disability (TPD) Cover?

TPD cover pays you a lump sum if you become totally and permanently disabled. This could help cover the costs of rehabilitation, debt repayments and the future cost 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 unable to work in your own current occupation, or unable to work in any occupation again.

What is 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, for example 30 days. After the waiting period, the policy should pay you the agreed amount until you are able to return to work, or for 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.

MoneySmart recommends that in order to work out how much cover you may need, 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, and 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, as that could alleviate child care expenses, for example. 

MoneySmart also suggest 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.

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. 

Image Source: Alex_PO (Shutterstock)

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