Things to be aware of about life insurance

4-minute read

We’ve outlined a few facts you should know before buying life insurance in Australia.  In this article, we provide factual information only, to help you understand what life insurance is.

What types of life insurance are available?

There are four main categories of life insurance coverage in Australia.

Life cover

Also called term life insurance or death cover / death benefit, this policy is designed to pay a lump sum when you pass away or are diagnosed with a terminal illness. Some life insurance policies also offer total and permanent disability and trauma (critical illness) cover as additional benefits. We discuss these further below.

You can choose either: 

The two common premium structures offered by Life Insurers are Variable Age-Stepped (previously called Stepped Premiums) and Variable Premiums (previously called Level Premiums).

• Variable Age-Stepped Premiums
  • Are calculated based on the age of the insured at each Policy anniversary. 
  • As the insured person ages the premiums usually increase to reflect the increased likelihood of claimable events over time.
• Variable Premiums
  • Are calculated based on the age of the insured at the Policy start date.
  • In earlier years these premiums are generally higher than aged stepped however in later years may be comparatively less than aged stepped because the annual premium does not increase with the insured age. 

Also available from some insurers are Fixed and Fixed Age-Stepped Premiums, which sets the premium amounts and may be reviewed after a set period (e.g. one year). 

 

Premiums can also change due to any tax, duty or charge or changes introduced by government, or if the insurer changes their premium rates. Both Premium structures can change for a range of other reasons, please see the relevant product PDS for more details. 

Total and permanent disability insurance

This policy is designed to pay a lump sum if you become totally and permanently disabled due to illness or injury.
 

You can choose cover for either:

• Your own occupation – if you can’t work in the job you were doing before your disability. This is the most expensive type of cover.
• Any occupation – if you can’t ever work again in any job suited to your education, training, or experience.

As with life cover, the two common premium structures offered by Life Insurers are Life Insurers are Variable Age-Stepped (previously called Stepped Premiums) and Variable Premiums (previously called Level Premiums).

See Life Cover for more information. 

Trauma insurance

Also called Critical Illness cover, this policy is designed to pay a lump sum if you suffer a critical illness, such as cancer, heart disease or a stroke.
 

Trauma insurance is typically used to pay for things like medical costs, ongoing living expenses, modifications to housing and loan payments. Again, premiums can be stepped or level.

Income protection insurance

Income protection pays a wage of up to 70% of your pre-tax income, if you are unable to work due to an illness or injury.
 

Income protection policies can have different waiting periods before payments start. Typically, the longer the waiting period you choose, the cheaper the policy is. So, think about how much sick and annual leave you have, and your access to emergency funds to support your financial commitments between any claimable event and the end of the waiting period.
 

You can also choose how long you want the benefit payments to last. Two or five years is standard. The longer the benefit period, the more expensive the policy is.  

Child Trauma Cover

Child Trauma Cover pays a lump sum payment in the event a child is diagnosed with a terminal or serious illness or has a specified serious injury.
 

The payment can help with medical treatment, rehabilitation costs or replace lost income for parents who need time off work. Rather than a standalone policy, child trauma cover is often an optional benefit on an adult policy.

How do you buy life insurance in Australia?

There are several ways to buy life insurance in Australia, depending on how the life insurance is sold.

• Speak to your bank
• Speak to a financial adviser
• Use a life insurance broker
• Liaise directly with a life insurance company
• Life insurance may be provided as a group policy purchased by the trustee of a superannuation fund or employer. In this case, fund members are provided a default level of cover, however this will vary based on the superannuation fund or employer.

Do you automatically get life insurance through superannuation?

There are typically three types of life insurance which can be provided through a superannuation fund.

1. Life cover
2. Total and permanent disability insurance
3. Income protection insurance.
    

Some superannuation funds automatically provide default life insurance cover and total and permanent disability insurance cover. Income protection insurance is often an optional extra.  
 

The default level of insurance cover provided by a superannuation fund is often set at a specific amount and may not be customisable. It’s also worth being aware this default cover is generally more restricted than life insurance policies held outside of superannuation funds.
 

Speak to your superannuation fund provider about the types and levels of cover they offer, and / or seek personal financial advice from a financial adviser about what’s right for you.

How does life insurance impact my tax liability?

The premiums you pay for life insurance are treated in different ways depending on the type of cover you hold, and whether the policy is held inside or outside of superannuation.
 

Similarly, the payments made by your insurer to you or your beneficiaries resulting from a claim may be taxed in some scenarios but not in others.
 

It is best to speak with your accountant, a financial adviser, or the Australian Tax Office (ATO) to understand how you and your beneficiaries should treat these aspects. This is general information only and does not constitute tax advice.