What Is Life Insurance?

Find out what life insurance is and how it works with Savvy today before buying your policy.

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, updated on July 10th, 2023       

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Life Insurance

Life insurance is an important financial product which can provide some much-needed financial security to you and your loved ones in the event of your death, disablement, illness or injury. However, before you purchase your policy, it’s important to have a clear understanding of what life insurance is and how it works.

You can find out all the ins and outs of life insurance in one place in Savvy's helpful guide. Learn about the different types of policy available to you as a buyer and the best ways to compare policies available on the market.

What is a life insurance policy and how do they work in Australia?

A life insurance policy is a contract between a policyholder and an insurance company in which the insurer agrees to pay out a sum of money upon the death, disablement, illness or injury of the policyholder (depending on the type of policy) in exchange for regular premium payments. Premiums are usually paid either monthly or annually.

Upon a successful claim being made, the sum insured is typically paid out to the policyholder's beneficiaries, such as their spouse or children, and is intended to provide financial security and support should they pass away or no longer be able to contribute to household income.

Overall, life insurance policies can provide valuable financial protection for you and your loved ones, helping to ensure that your beneficiaries are taken care of should a covered event take place.

What are the different types of life insurance in Australia?

There are several different types of life insurance to choose from when comparing your options on the market. These are:

Life cover

Life cover, also known as term life insurance or death cover, is a type of insurance policy which can pay out a lump sum to your nominated beneficiaries in the event of your death or diagnosis of a terminal illness. This payout can be used to cover expenses such as funeral costs, debts and ongoing living expenses.

This type of cover comes without a set maximum payout, so you can choose whatever covered amount is appropriate for you, your family and your budget. The policy also typically has a fixed term length, usually ten to 30 years.

Income protection insurance

Income protection insurance is a type of policy which can provide a regular ongoing payment to replace some of your income if you’re temporarily unable to work due to an illness or injury. In Australia, income protection insurance is designed to cover up to 70% of your pre-tax income, with benefits paid monthly.

The policy will typically have a waiting period of between two weeks and two years before payments start and a benefit period of up to five years or until you reach the age of 65 (depending on your insurer’s terms and conditions).

Total and permanent disability (TPD) insurance

TPD insurance is a type of insurance policy which can provide a lump sum payment if the insured person becomes totally and permanently disabled and is unable to return to work. Under this policy, you can choose to insure yourself for a sum of up to $3 million to $5 million (subject to your insurer’s terms and conditions).

In Australia, there are two main types of TPD insurance: Any Occupation and Own Occupation. Any Occupation policies can only pay out if the insured is unable to perform any occupation for which they are reasonably suited based on their education, training, and experience. Own Occupation policies, on the other hand, can pay out if the insured is unable to return to their current position, regardless of whether they can work in a different occupation.

Trauma insurance

Trauma insurance, also known as critical illness insurance, is a type of insurance which can pay a lump sum benefit in the event you suffer a serious medical condition or illness, such as cancer, heart attack, stroke or major head trauma. This benefit can be paid out regardless of whether you’re able to return to work and can be used to cover medical expenses, ongoing treatment costs or any other financial needs that may arise as a result of your illness.

Trauma insurance can provide financial security during a difficult time, allowing you to focus on your recovery without having to worry about the financial impact of your illness. It may be able to offer payouts as high as $2 million with some insurers.

The amount of cover and the conditions covered by each policy can vary depending on the insurer and policy, so it’s important to carefully read and understand the policy terms and conditions before signing up.

How do I compare life insurance to help me find the best for my needs?

There are many areas to consider when comparing life insurance policies to help you determine which is the best for your situation. These include:

  • Premium cost: premiums are the regular payments you make to the insurance company to keep your policy active. When comparing policies, it's important to consider the cost of premiums and how they fit into your budget.
  • Coverage limit: it’s crucial to choose a policy with a coverage limit which is sufficient to cover your loved ones' needs in case you pass away. This can include expenses such as funeral costs, outstanding debts and ongoing living expenses.
  • Inclusions: beyond their coverage in relation to death, injury and illness, it’s worth looking for policies with inclusions which may be useful for you, such as funeral advancement cover, worldwide coverage and inflation-proofing.
  • Exclusions: policies will also come with a range of exclusions, such as suicide (within the first 13 months), criminal activity and alcohol or drug use. Participation in risky sports such as paragliding may also be excluded. When comparing policies, it's important to consider the exclusions and ensure you understand them fully.
  • Policy riders: riders are additional benefits which can be added to your policy to provide extra coverage (typically for an added cost). For example, some insurers may offer policy riders for accidental death or insurance cover for your child. Consider whether they align with your needs before adding them to your policy.
  • Waiting periods: waiting periods refer to the length of time you must wait before making a claim on your policy. When comparing policies, it's important to consider the waiting periods and whether they align with your needs. Income protection may have waiting periods of between two weeks and two years, as mentioned, while trauma and TPD cover may come with 90-day waiting periods.
  • Special deals: in some cases, life insurers may offer special deals such as discounts or free gifts as an incentive to sign up for coverage. However, it’s important to assess whether the policy is right for you beyond this incentive.

How much does life insurance cost?

The pros and cons of life insurance

PROS

Financial security and peace of mind

The primary benefit of life insurance is that it provides financial security to your family in case of a covered illness, injury or death. The payout from your policy can cover immediate expenses like funeral costs, as well as ongoing expenses like mortgage payments and household bills.

Can help clear your debts

If you’re unable to work and earn income due to unforeseen circumstances, your life insurance policy can help you pay off existing debts, such as mortgages, credit card bills and other financial obligations. This can relieve the financial burden on you and your family during a difficult time.

More affordable premiums for younger people

If you’re under 40, you may be able to get a life insurance policy at a lower cost than older individuals. This is because younger people are often considered lower risk and can get more affordable premiums.

Tax-free payouts to dependents

In Australia, payouts from life insurance policies to your dependents are typically tax-free. This means that your loved ones may not have to pay income tax on the lump sum they receive from your policy, providing them with greater financial stability.

CONS

Can be expensive

The cost of life insurance can add up, especially if you’re paying premiums for many years before making a claim. This may put a strain on your budget.

Complex claims process

Life insurance claims can be complex and time-consuming, particularly if the cause of death is unclear or the medical conditions fall outside the policy’s coverage. However, any inclusions or exclusions will be determined at the point of purchase, so you should be aware of what is and isn’t covered.

May not qualify

You may need to undergo a medical exam to qualify for life insurance which involves providing blood and urine samples. If you don’t meet the underwriting standards of the insurance company, your application may be denied or delayed, although not all policies require a medical exam.

Frequently asked questions about life insurance and how it works

Can I buy life insurance if I have a pre-existing condition?

It's possible to purchase life insurance with a pre-existing condition, but whether you can do so will depend on your insurer’s terms and conditions. They’ll usually ask about your medical history and may require a medical examination to assess the level of risk you pose.

The premiums you pay may be higher than those paid by people without pre-existing conditions, or the insurer may exclude certain conditions from the policy. If you’re deemed too great a risk, your application for coverage may be denied.

What’s the difference between term and whole life insurance?

Term life insurance provides coverage for a specified period (such as ten to 30 years) while whole life insurance provided coverage for the entire lifetime of the policyholder, as long as the premiums are paid. You could also cash out your whole life policy’s surrender value and receive a lump sum even if you didn’t need to make a claim. However, whole life insurance is no longer available in Australia.

What’s the difference between stepped and level life insurance premiums?

Stepped life insurance premiums start lower and gradually increase over time as your risk profile naturally increases with age. On the other hand, level premiums remain the same over the life of the policy, only increasing in line with inflation.

Is life insurance cheaper for women than men?

On average, life insurance for women is cheaper than it is for men in Australia, as they’re often considered a lesser risk to insure and have longer life expectancies.

How do I buy life insurance through Savvy?

Buying life insurance through Savvy is simple. Simply follow these steps:

  1. Fill out an online form to share information about you, your profile and the type of cover you’re after
  2. Compare quotes from a panel of trusted insurers in one place
  3. If you find one you like, schedule a call back from a life insurance expert to discuss further
  4. Once you’re happy with it, you can purchase your policy online
Am I able to combine multiple life insurance policies with the same insurer?

Yes – it’s possible to bundle multiple life insurance policy types with the same insurer, provided you satisfy their eligibility criteria. For instance, you may want overall life cover, but also income protection if you’re temporarily sidelined from work. This may make it easier to manage premiums and coverage, but it's important to consider the overall cost and value.

How do I work out the amount of life insurance cover I need?

To help you determine the amount of life insurance cover you may need, consider factors such as your debts, ongoing expenses and future financial needs for your dependents.

Is illness or death as a result of COVID-19 covered by life insurance?

Most life insurance providers these days will offer death or critical illness cover relating to COVID-19. However, it's important to review your policy and speak with your insurer to understand your coverage. You generally won’t be able to purchase life insurance if you’re yet to recover from COVID-19 or are still experiencing symptoms.

Is life insurance tax-deductible?

Life insurance generally isn’t tax-deductible when it’s purchased outside of your super fund. However, you may be able to claim income protection insurance premiums on your tax return. It’s important to discuss with a financial professional if you’re unsure about what can and can’t be claimed on your tax return.

Helpful life insurance guides

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Life Insurance Exclusions

Find out some of the typical life insurance exclusions right here with Savvy. When you purchase life insurance, taking note...

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Types of Life Insurance

Find out more about the different types of policies available in Australia with Savvy today. Compare quotes now Instant quotes...

Compare life insurance policies side-by-side

Through Savvy, you can consider a range of competitive life insurance policies from reputable insurers, whether you're after life, income protection, trauma or TPD cover. Get the ball rolling on comparing your available options today!

Disclaimer:

Savvy is partnered with Compare Club Australia Pty Ltd (AFS representative number 001279036) of Alternative Media Pty Ltd (AFS License number 486326) to provide readers with a variety of life insurance policies to compare. Savvy earns a commission from Compare Club each time a customer buys a life insurance policy via our website. We don’t arrange for products to be purchased from these brands directly, as all purchases are conducted via Compare Club.

Savvy does not compare all life insurance policies or providers currently operating in the market. Any advice presented above or on other pages is general in nature and doesn’t consider your personal or business objectives, needs or finances. It’s always important to consider whether advice is suitable for you before purchasing an insurance policy.

For any further information on the variety of insurers compared by Compare Club or how their business works, you can read their Financial Services Guide.