Life insurance

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Imagine what your family's life would be like if you or your partner died or became seriously ill and couldn't work. Would you be able to survive financially? Being unable to work as a result of an accident or ill-health could expose you or your family to financial difficulty. Insurance can provide the money you or your family need in these critical times.

It is a good idea to review your life insurance regularly, especially if something has changed in your life, for example, if you've taken out a home loan, are having kids or starting a business.

Types of life insurance

Smart tip

When working out what insurance you need, always read up on what's included and excluded in each policy.

There are different types of cover that fall under the broad heading of life insurance. Depending on your circumstances you may need one or more of the following:

  • Life cover - also known as 'term life insurance' or 'death cover', pays a set amount of money when you die. The money will go to the people you nominate as beneficiaries on your policy.
  • Total and permanent disability (TPD) cover - pays a lump sum to assist with rehabilitation and living costs if you are totally and permanently disabled. TPD is often bundled with life cover.
  • Trauma cover - provides cover if you are diagnosed with a specified illness or injury. These policies include the major illnesses or injuries that will make a significant impact on your life, such as cancer or a stroke. It is sometimes called 'critical illness cover' or 'recovery insurance'.
  • Income protection - replaces the income lost through your inability to work due to injury or sickness.

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How much life insurance do I need?

Smart tip

Life insurance offered by your super fund is often cheaper than through other providers, but it is important to shop around to find the right policy to suit your needs.

There is no correct answer, but more insurance gives you more protection. However, it also depends on what you can afford, so you may need to prioritise.

To help work out the best level of insurance cover for you, consider:

  • How much cash your family would have if you were to die or become disabled. How much money is in superannuation, shares, savings and existing insurance policies? How much paid leave do you have? What type of support could your family provide? You may also be entitled to government benefits or workers compensation if you get injured (although this may be reduced by income protection claims). 
  • How much cash your family would need if the worst were to happen. Consider the size of your mortgage and any other debts, as well as childcare, education and other costs.

The difference between these is the amount of cover you should get. However, you may need to compromise between what you would like and what you can afford.

Before you start comparing policies, check whether you already have life insurance through your super fund, as you may already have some cover.

You may decide to change your level of cover based on changes to your lifestyle. For example, if you have children and a large mortgage you may decide you need more cover. Alternatively, if you've paid off your mortgage or no longer have financial dependents you may decide to reduce your cover.

Review your life insurance policies every time your income changes or your personal circumstances change to make sure you have the right type and level of cover. 

Switching life insurance cover

If you decide to swwitch your life insurance cover to a different insurer, don't just look at the difference in premium. It is also important to consider:

  • Level of cover - will you be recieving the same level of cover, and is this the cover you need? For example, if your current insurer covers any pre-existing conditions, will your new insurer do this as well?
  • Waiting periods - do any waiting periods apply to different types of benefits with your new insurer?

A licensed financial adviser can help you choose the right insurance cover for your needs. For more information, see our financial advisers register.

Insurance calculators

There are many online insurance calculators to help you work out how much cover you should have. Some have detailed questions so it is a good idea to check a few different calculators to see a range of recommendations for your circumstances.

What's the difference between stepped and level premiums?

Insurance premiums usually increase with age because the older you get, the more likely you are to make a claim.

For insurance such as life, total and permanent disability, or trauma cover, you may be able to choose between stepped or level premiums.

Here is the difference between stepped and level premiums:

  • Stepped premiums - Your insurance premium will increase each year as you get older but is usually cheaper in the beginning. If you're thinking about this option, it is worth looking at what the premiums will be over the next 5 years, or however long you intend to hold the insurance for, to make sure you can afford the premiums.
  • Level premiums - Your insurance premium does not change due to your age but is generally more expensive than a stepped premium in the beginning. Level premiums may increase over time due to inflation adjustments or changes to the insurer's fees.

If you want to control your costs over time then level premiums may suit you. Premiums are usually higher in the beginning but much cheaper than stepped premiums when you are older. If you intend to hold the insurance for a long time, level premiums are likely to be cheaper in the long run.

How can I get a policy?

You can buy life insurance in three main ways:

  • Your super fund - Many working Australians have some life and disability insurance with their superannuation. See insurance through super.
  • Insurance companies
  • Insurance brokers and financial advisers

It is a good idea to shop around and compare policies based on the level of cover they provide, exclusions and value. If you switch to a different insurer it is important to keep your existing cover until you have a new policy in place so you're always covered.

Before you apply for insurance, check the insurance provider's website or product disclosure statement to find out if they will cover any pre-existing medical conditions. You will need to disclose relevant details of your medical history to the insurance provide if you are asked. Failing to 'tell it like it is' could leave you with a worthless policy. 

Read ASIC's report, Review of retail life insurance advice, to learn what ASIC found about the quality of life insurance advice from finanical advisers.

Whatever insurance you choose, it is important to review your cover against your needs on a regular basis. 

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Last updated: 12 Oct 2016