Did you know that many Australians are under-insured when it comes to life insurance? The median cover amount for policyholders is $143,500, which only covers around twice the median income for the average household — often, this is not enough.1
What is life insurance and why is it worth it?
Life insurance (also known as ‘Death’ insurance) is a way to protect your family from financial hardship if you pass away. An unexpected death can impact a family both emotionally and financially. The loss can leave some families struggling to meet everyday costs like rent or mortgage repayments, groceries, bills, and school fees. This is why people have insurance protection. If you die, the people you’ve nominated on your policy can receive a lump sum (also known as a death benefit payment or payout). It’s a way to secure your family’s future and alleviate them from additional stress caused by any outstanding financial commitments.
Some life coverage policies include protection for Critical Illness (or ‘Trauma’) too, which covers you for severe (usually terminal) critical illnesses.
If you’re not sure whether life insurance will benefit you, consider the following pros and cons.
- You can protect your family from financial challenges if you die unexpectedly or are diagnosed with a serious illness.
- Life Insurance benefits in Australia are often exempt from tax when held outside superannuation.
- Life insurance can help reduce stress for your loved ones by covering not only ongoing life expenses but funeral costs.
- You’ll need to factor monthly premium payments into your budget.
- Death benefit payout is only granted if all conditions of the policy are met — it may not be guaranteed (for example, where a policyholder did not disclose a pre-existing health condition during their application, a claim made on the policy later may be declined).
How does life insurance work?
When you apply for a life insurance policy, you request a cover amount which depends on your budget and needs. Usually, the higher your cover amount (or ‘sum insured’), the higher your premiums.
You’ll also need to answer a range of questions about things like your health, occupation, and lifestyle. The insurer will assess these factors to work out how likely you are to make a claim, whether your policy needs any special conditions, and how much your premiums will cost.
When you set up your policy, you’ll need to nominate your beneficiaries — the person or people who would receive the cover amount. In the event that you pass away, the person you nominated may submit a claim for the cover you held.
Life insurance coverage and benefits
The main purpose of life insurance is to provide financial cover for your loved ones in the event that you pass away. But some life insurance policies offer benefits on top of death benefit payouts. For example, terminal illness cover is commonly included in a life insurance policy. Terminal illness provides a payout if you’re diagnosed with a critical medical condition that’s defined by the policy. This payout can help with the often heavy medical costs that come with managing a critical medical condition.
Depending on the policy, you may also get extra benefits like cover for your children, funeral costs, financial planning and grief counselling. When choosing a life insurance policy, you should compare the features and benefits offered by each insurer.
How much does life insurance cost?
There are various factors that could impact the cost of your life insurance, including:
- the insurance provider;
- your sum insured — if you need more cover, your premium cost will be higher;
- your health — if you’re not in good health, you’ll likely pay more in premiums than someone who is considered healthy;
- your occupation — if your job is considered riskier than others (for example, if you work at great heights or on hazardous construction sites), you may pay more in premiums or have exclusions applied to your policy;
- policy options, features and benefits — policies with special features and extra benefits may cost more;
- coverage options — if you’ve bundled your life insurance with other types of cover — like critical illness — you may pay more in premiums, and
- premium structure — structure impacts how much your premiums are
You may also have to pay an extra fee known as ‘loading’ if the insurer assesses that you’re more likely to make a claim. For example, if you have a pre-existing medical condition like high blood pressure, sleep apnoea or cancer, your policy may include a loading.
How to choose the right policy: factors to consider
It’s tempting to go with the insurance provider that has the cheapest deal, but there are other policy options and features you should consider comparing before making a final decision.
To help you with policy selection, our comparison tool looks at the premium costs for the level of cover you’d like, as well as:
- coverage options, including whether all or some medical conditions are covered;
- standard exclusions (for example, suicide or intentional self-inflicted injury);
- whether you’re covered during underwriting, and
- extra benefits like funeral advancement payments, financial planning benefits, child cover and grief counselling benefits.
There are other things to consider, like the insurer’s claim acceptance rate — that is, how often they pay out claims. A higher claim acceptance rate can be attributed to many factors such as an insurer offering policies and claims processes that are reliable and robust. This is important when it comes to claim time — you want to be with an insurer you can trust to pay your claim when you need it. Keep in mind that higher claim rates usually results in higher premiums — insurers need to charge more to cover the cost of the claims they pay. You can also check how much in claims the insurer has paid, and what kinds of services they offer (like counselling resources and telephone underwriting).
How much insurance do you actually need?
The right level of cover will depend on how much your beneficiaries will need when you’re gone and how long they’ll need it for. To start, consider what expenses could look like for your family if you weren’t around. Do you have any outstanding debts? What do the everyday expenses look like, that is, groceries, education, utility bills. Do you have any savings or investments they could use? How long would your family rely on the insurance payout for? This could be impacted by things like how many children you have, how old they are, and your partner’s ability to work.
Our comparison tool includes a calculator to help you work out how much you might need and compare insurance providers to help you make a decision. If you’d like to chat through your options, you can also speak to one of our consultants by calling 13 54 33.
1Life insurance adequacy, published by Rice Warner, 8 February 2018
Frequently asked questions
Life insurance policies normally include a cooling-off period — if you cancel your policy within that time, you’ll receive any paid premiums back in full. If you cancel your policy after the cooling-off period, you generally won’t receive any premium refunds.
No — life insurance payouts are often tax free in Australia. There are some exemptions to this though. For example, if your policy is held through your super, payments made to an adult who is not a dependant may be taxable.
Yes, you can. For instance, some people hold a life insurance policy inside super and another outside super. Stand-alone policies can sometimes provide benefits that a policy inside super may lack, like Trauma cover. It may be useful to review compare both policies to ensure you aren’t over insured.
Many policies cover suicide, but there’s usually a 13-month waiting period
Generally, yes. You can also decide how your death benefit payout is distributed between your beneficiaries — that is, the share that each beneficiary will receive.
Term life insurance means your life insurance only covers you for a certain term or period of your life. For example, policies will often cover you until a certain age — if you die after that age, you will not be covered by your term life insurance. Policies that covered you for your entire life are no longer sold in Australia.
Yes — as your life changes, your insurance needs change too. It’s a good idea to review your policy every 12 to 18 months to make sure you’re still covered for what you need. There are various reasons you may need to apply for changes in your cover:
• A change in your salary may mean you need to change your sum insured.
• If you’ve had children, you may have more beneficiaries to account for. You may want to review your beneficiaries and your sum insured. The same principle applies if you’ve started caring for relatives.
• Changes in your debt and assets may impact how much you need to be insured for. For instance, if you’ve paid off a chunk of debt, you may consider reducing your cover as you have less expenses to account for.
When you compare and select a policy through our website, one of our consultants will call you to get the application process started. Applying for life insurance involves an assessment of your health. You’ll need to answer a series of health-related questions, and, depending on your responses, the insurer may require medical reports if you have pre-existing conditions. It’s vital to be honest and transparent when providing information to your insurer — if you’re found to have been misleading, your policy may become void when it comes to claim time.
Every individual has unique needs, and the right life insurance policy for one person may not work well for another. That is why it’s important to research your options. You can use our calculator and comparison tool to get an idea of policies that may suit you best. It can also help to speak to an expert — you can consider talking to a financial adviser or having a chat with one of our consultants by calling 13 54 33.