What is life insurance?
Life insurance is an insurance policy that pays out a lump sum of cash to people of your choice if you pass away. It’s sometimes called life cover, death cover or term cover.
In most cases, beneficiaries are immediate family members such as your spouse or children, and some insurers also payout if you’re diagnosed with a terminal illness.
This payout makes life easier for those you leave behind, helping them to cover everyday living costs, mortgage repayments and funeral expenses.
How does life insurance work?
With life insurance, you’re required to pay premiums (regular payments) to your insurer and in return, they’ll guarantee to pay out under your policy.
Most policies cover you up to a maximum age of 99 but your premiums will most likely increase as you’ll get older.
You’ll also be able to choose the amount of your policy’s lump-sum payout, which can be a difficult decision.
What does life insurance cover?
Life insurance pays a lump sum in the event of your death which you can use for anything you like. Usually, this is used to cover:
- Funeral costs
- Debt repayments
- Your family’s living costs
Life insurance policies can also include other types of coverage, which can cover physical trauma, permanent disability, loss of income, and more.
Common Life Insurance Coverage
Trauma insurance
Pays out a lump sum when you suffer a traumatic injury or illness such as cancer or a serious head injury.
Income protection insurance
Pays out regular benefits for a set period if you lose your income due to injury or illness.
Total and permanent disability insurance
Pays out a lump sum when you suffer an injury or illness that leaves you totally and permanently disabled.
May also include cover for partial disablement such as loss of sight or limb.
Do I need life insurance? Take The Quiz
Not everyone needs life insurance - ask yourself the questions below to help decide if you do:****
- Am I likely to make a claim?
If you’re young, healthy, don’t work in a high-risk profession, or partake in any high-risk hobbies, the chances of you passing away may be slim.
Whole life insurance may be a good idea just in case it’s up to you to decide whether you need it.
On the other hand, if you’re older and have had health issues in the past, life insurance could be a good way to protect your family if the unexpected happens.
- Does my family depend on my income?
When deciding if you need life insurance it’s important to think about those you leave behind - your family.
Could they afford everyday costs, mortgage and debt repayments, school fees and bills if they no longer receive your income?
Would they be able to enjoy the same standard of living after you pass?
Chances are if they depend on your income your passing could cause financial difficulties for them and life insurance could be a good way to make it easier.
- Do I have debt and other financial obligations?
If you have no financial obligations life insurance might not be necessary.
If you’ve got a mortgage, personal loans, credit cards, car loans and other financial obligations, life insurance may be a good idea to cover repayments after you’re gone.
- Can I afford life insurance premiums?
Paying your life insurance premiums shouldn’t cause you financial stress.
Take a close look at your income and expenses to make sure you’ll be able to easily afford premiums before you buy a life insurance policy.
The benefits of life insurance
Life insurance can make life and death easier for you and your family by providing financial assistance during hard times.
This can help you and your family to deal with what’s happening instead of worrying about money.
Life insurance can cover costs like:
- Care in the event of temporary or permanent disablement.
- Your family’s living costs if you pass away.
- Legal fees.
- Your children’s inheritance.
- Debt and/or mortgages.
- The cost of your funeral.
- Replacing your income if you’re unable to work.
Having the right life insurance policy in place is particularly important if you have a family who depends on you and/or fixed costs like a mortgage or business overheads.
A policy tailored to you and your needs will ensure that if the unexpected happens.
How to choose the right cover
Before you buy life insurance you must take the time to compare what’s on the market to make sure you’re getting a fair deal that suits you and your circumstances.
The easiest way to compare policies is by doing your own research online and visiting each insurer's website.
If you’re not confident choosing a policy on your own you can speak to an insurance broker or financial advisor for help comparing policies and expert advice.
Here are the main factors to look at when comparing life insurance policies:
Premium amount
Your life insurance premiums should be affordable. If yours are too expensive you can decrease them by making changes to your policy such as:
- Decrease benefits.
- Decreasing your sum insured.
- Choosing a different premium type (stepped or level).
It’s important to strike a good balance between having low premiums and the right level of cover.
Lump-sum amount
The amount of the payout received when you pass away is one of the most important factors to consider when buying life insurance. More on this below. ****
Stepped or level premiums
There are two types of life insurance premiums - stepped and level:
- Stepped premiums start low and increase as you age.
- Level premiums start higher and stay the same (or increase less) as you age.
Stepped premiums are a great way to lower premiums now but be prepared to pay more in the future.
Level premiums, on the other hand, may start higher but they’ll give you more certainty around costs in future.
Maximum age/expiry age
Most life insurance policies have a maximum entry age - the oldest you can be when you buy a policy. Typically this age is around 65.
Policies also have a set age at which your policy ceases to be active - usually around 99.
Benefits and add-ons
Life insurance policies have several benefits and add-ons that may be useful including:
- Benefit indexation: your lump-sum payout amount increases by a small amount every year to keep up with inflation.
- Bundled policies: other life insurance policies are included with your life cover, like TPD, trauma insurance and income protection.
- Funeral advance: an immediate payout in the event of your death to cover funeral costs.
- No medical required: if you’re young and healthy some life insurance policies don’t require a medical assessment.
- Interim accidental death: some policies include free accidental death cover which pays out if you die while the insurer is assessing your application.
Benefits and add-ons may increase the price of your policy so make sure you only have ones that you need and are likely to use.
Don’t go with the big-name insurers by default. Check out the lesser-known insurers too as they often have great value policies with low premiums.
Continue reading our series of guides below to learn more about life insurance.
Types of Life Insurance
On this page:
- Life insurance policy types
- Whole term life insurance
- Life insurance policy add-ons
- The difference between trauma insurance and TPD
Choosing a Life Insurance Policy
On this page:
- Before you apply
- How much cover to choose
- Life insurance premiums
- Comparing life insurance policies
- Life insurance for seniors
How to Get Life Insurance
On this page:
- Life insurance eligibility
- Where to buy life insurance
- Life insurance and superannuation
- The cost of life insurance
- Free Life Insurance Quote
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Shaun
McGowan
Shaun McGowan
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
