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Last Updated on 28 March 2020

Types of life insurance


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Life insurance is a daunting topic that many avoid talking about, but the right policy can provide long term financial security for you and your family. There are 4 types of life insurance in Australia, all of which can help you protect your loved ones. With so many options at your disposal, it’s important to know how they differ so that you can find the best life insurance policy for your situation.

Term life insurance (death cover)

What is term life insurance?

Term life insurance, also called death cover or death benefit, is a type of cover that provides a lump sum payment to your beneficiaries if you die or are diagnosed with a terminal illness. You can choose the cover amount and you’ll pay premiums for the duration of the policy.

Direct term life insurance

Direct term life insurance is a type of term life insurance that’s available directly to consumers. Rather than buying cover through an agent, you’ll be able to purchase a policy online or by phone.

Group term life insurance

Often used by employers and super funds, group term life insurance is a single term life insurance policy that covers a group of people.

Advised term life insurance

Advised life insurance is any type of term life insurance that is obtained through a specialised financial adviser. Rather than purchasing cover directly, this option gives you access to professional guidance that can help you narrow down your options.

Pros and cons of term life insurance

Pros

  • Lump sum payout. Your premiums go towards an agreed benefit amount which will be paid to your family when you die. The benefit is paid as a lump sum amount, which can help your family pay off debts and bills, be used as income or put towards maintaining their lifestyle and goals.
  • Advance payment for terminal illness. If a medical practitioner determines that you are expected to die within 12-24 months (depending on your insurer), your policy can provide an early payout to help with final medical expenses.
  • Renewable. Most policies are renewable up until age 99, though some restrictions may apply.
  • Few exclusions. Most plans only have a few exclusions, the main one being that the policy won’t pay out if your death is the result of suicide shortly after your cover begins (the exact amount of time will depend on the insurer). Outside of that exclusion and injury/illness claims, your family will likely be able to rely on a cash payout when you die.
  • Additional options. Your death is only one of many circumstances that could leave your family unable to rely on your income, so many policies allow you to add extras like total and permanent disability insurance and trauma insurance, that can provide additional protection.

Cons

  • No cash value. Term life insurance doesn’t accumulate an investment portion, so your beneficiaries won’t receive a death benefit if you outlive the term of your policy and die after it has expired.
  • Rising cost of renewal. When the policy expires at the end of your term, you’ll either need to renew or take out a new policy if you want to remain covered. However, premiums and health risks increase as you age, so cover will become more expensive after each term.
  • Premiums may vary. Your premiums will be based on the level of risk you present to your insurer, so if you smoke, engage in high-risk activities or work a dangerous job, you can expect to pay more than others.

How does term life insurance work?

Generally speaking, term life insurance provides a payout when the insured person dies or is diagnosed with a terminal illness. It is often used to:

  • Pay mortgage bills and other debts
  • Help loved ones pay for ongoing expenses
  • Pay for funeral costs
  • Replace lost income
  • Ensure that loved ones can maintain their current standard of living in the absence of your income

Term life insurance cover exclusions

There are a few situations that are not usually covered by term life insurance:

  • Suicide or intentional self-inflicted injury within the first months of cover
  • Death caused by involvement in illegal activity
  • Involvement in a dangerous activity like extreme sports

Who should take out term life insurance?

Term life insurance provides effective cover in the event of lost income, making it ideal for:

  • People with loved ones that may struggle to pay off debts on their own
  • People who want to leave an inheritance to their family
  • People who would struggle to pay for medical expenses if they became terminally ill

How much does term life insurance cost?

The average cost is about $18 per month for a 40 year old male with $250,000 of cover. If you want a more accurate estimate, you can get term life insurance quotes that reflect your situation. You can use this free online tool to compare life insurance costs.

What factors influence the cost of life insurance premiums?

The cost of term life insurance can vary depending on your situation, which is why a personalized quote will give you the most accurate estimate. There are a number of factors that can influence the cost of your premiums:

  • Age. Younger people have a lower risk of dying so there’s a good chance you’ll be paying the insurer for years before they ever have to worry about paying a claim.
  • Gender. Women have a longer life expectancy than men, meaning they pay premiums longer and therefore get slightly lower rates.
  • Occupation. People working dangerous jobs have a higher risk of filing a claim and will likely pay higher premiums.
  • Lifestyle. Partaking in risky activities – like skydiving, racing cars or heliskiing – puts you at higher risk of getting hurt. Therefore, people with more laid-back lifestyles will often pay lower rates.
  • Family history. Having a family medical history of serious medical conditions like strokes or cancer may put you at a higher risk of these ailments and lead to higher rates.
  • Health. Most carriers will require a medical exam where they will record your height, weight, blood pressure, cholesterol and so on. Smoking and other high-risk activities that affect your health will lead to higher premiums.
  • Driving record. Reckless driving is a risk to your life and makes you more likely to file a claim. Having multiple tickets or accidents will likely lead to higher premiums.

Total & permanent disability insurance (TPD)

What is TPD insurance?

TPD or total and permanent disability insurance provides a payout if the policyholder becomes totally and permanently disabled. In most cases, you will need to be unable to return to work in order for your claim to be paid. The type of cover you purchase can determine when you would receive a payout:

Own occupation

Pays out if you become unable to perform the duties associated with your current occupation due to illness or injury.

Any occupation

Provides a payout if you are unable to perform any occupation that you are reasonably suited for, considering your training, education and experience.

Home duties

Pays a benefit if you are unable to undertake domestic duties like cleaning your house, shopping for groceries or doing laundry.

Modified TPD

Pays a benefit if you’re unable to perform at least 2 of the 5 activities of daily life, which are: eating & drinking, dressing & undressing, using the toilet, bathing and moving from your bed without aid.

TPD cover through Super

Super

TBP cover inside superannuation allows you to pay premiums with Super funds, which could make own occupation TPD more affordable and free up more of your post-tax income. However, this method could eat into your Super balance and these policies are often less comprehensive than standard cover.

Flexilink

Since TPD life insurance is available both inside and outside of super, it’s possible to hold a combination of the two. Flexi-linked or split life insurance policies allow you to reduce the amount of post-tax income you spend on premiums and limit the amount of super funds you use. This way, you won’t need to compromise on cover or dip into the balance of your super as much.

Pros and cons of TPD cover

Pros

  • Lump sum payout. You’ll receive a lump sum payout if you become permanently disabled.
  • Plan options. Choose between any occupation, own occupation, home duties or modified TPD to tailor cover to your needs.
  • Extras. Get additional protection by adding policy options like life cover buyback when TPD is combined with life insurance.
  • High payout limits. Choose a benefit amount that will provide long-term financial security.
  • Tax benefits. Premiums are usually tax deductible if cover is taken through Super.

Cons

  • Limitations. TPD insurance only protects against total and permanent disability.
  • Specifications. In order to receive a payout, you’ll need to meet the specific definition as outlined in your PDS.
  • Conversion. Most policies convert to modified TPD at age 65 or 70.
  • Waiting period. Most policies will require disablement for 3-6 months before the benefit is paid.

How does TPD insurance work?

While term life insurance only covers death and terminal illness, TPD insurance can protect against a wide range of scenarios that leave you unable to work:

  • Cancers and tumours
  • Heart Conditions
  • Blood conditions
  • Neurological conditions
  • Severe accidents (loss of sight, hearing, speech, limbs, independence & paralysis)

However, you’ll need to keep in mind that cover will vary depending on your policy (own vs. any occupation, super, etc.), provider and other factors.

TPD insurance cover exclusions

As with most insurance policies, there are some exclusions that may not be covered by TPD insurance:

  • Disability caused by intentional self-harm
  • Certain pre-existing medical conditions
  • Special occupational risks
  • Any injury or disability not considered permanent

Check with providers and read policy documents to find out what exclusions apply.

How much does TPD insurance cost?

The cost of total and permanent disability insurance will vary depending on the cover you choose and many other factors. However, on average, TPD insurance costs about $15 per month. Keep in mind that own occupation cover is generally more expensive than any occupation cover. For a more accurate estimate, get a quote for TPD cover and compare your options to find a plan that’s right for your situation.

Who should take out TPD insurance cover?

Unlike term life insurance that aims to protect your loved ones, total and permanent disability cover can help protect you if you become unable to work. With that in mind, TPD cover is best for those who:

  • Want to provide financial security for themselves and their loved ones
  • Have existing debts or other financial obligations
  • Want to maintain their current lifestyle if they are no longer able to earn income

Income protection

What is income protection cover?

Income protection insurance helps you meet your financial obligations in the event that you are unable to work for longer than your waiting period. It can pay a monthly benefit of up to 75% of your regular income until you reach your maximum benefit period or you’re able to return to work. There are two main components to income protection cover:

  • Waiting period: The time between becoming unable to work due to sickness or accident and when your monthly benefit begins. You’ll be able to choose the length of the period, usually between 14 days and two years, however your insurer set this at their discretion.
  • Benefit period: The maximum length of time that you will receive a monthly benefit in the event that you cannot work due to sickness or accident. Terms are often 2-5 years or up to age 65/70.

Types of income protection cover

  • Indemnity value. This type of insurance provides a monthly benefit based on your current income or your income when you took out the policy, whichever is lower.
  • Agreed value. This type of policy establishes a fixed benefit amount when you apply for cover. In the event of a claim, you would receive that payout, regardless of your current income.

How does income protection cover work?

Unlike TPD, income protection cover provides a monthly benefit payout when you are temporarily unable to work. After choosing your policy and selecting your waiting and benefit periods, your policy will become active. In the event that you are deemed unable to work, your benefits would begin at the end of your chosen waiting period. However, the provider’s definition of “unable to work” could affect your cover:

Duties-based disability

  • You are unable to perform at least one essential duties in your role at work due to illness or injury.
  • Duties may include manual labour, management, paper work, meetings or presentations.

Income-based disability

  • Your income has been reduced by 20% or more as a result of illness or injury.

Hours-based disability

  • You are unable to work a given number (usually 10) of hours performing required duties of your occupation due to illness or injury.

Income protection cover exclusions

Like most insurance policies, there are a few scenarios where your income protection claim may not be paid:

  • Intentional, self-inflicted acts
  • Pre-existing conditions
  • Specific high-risk occupations like underground mining
  • Illness or injury from alcohol or illicit drug
  • Medically uncomplicated childbirth or pregnancy

Pros and cons of income protection insurance

Pros

  • Security. This type of cover provides an ongoing benefit payment of up to 75% of your monthly income, which can protect you if you cannot work.
  • Broad cover. Income protection insurance will usually cover injury and illness that occurs both at work and outside of the workplace.
  • Additional payments. Some policies can provide additional payments to help cover rehabilitation expenses.
  • Policy options and extras. You can choose your waiting period, benefit period and optional extras to tailor your policy to your needs.
  • Tax benefits. Premiums paid for this type of cover are generally tax deductible as long as the policy is not taken through Super.

Cons

  • Exclusions. Some occupations and pre-existing conditions may not be covered by this type of insurance.
  • Limited payouts. Income protection insurance generally covers up to 75% of your income, but that amount could be less depending on the provider and type of policy.
  • Waiting period. Premiums are more expensive for shorter waiting periods, so you might go months without income before your benefit payments activate.
  • No death coverage. Unlike term life insurance, this type of cover does not provide a payout in the event of your death.
  • Minimum working hours. Most policies require a certain number of hours per week in order to be eligible for cover.

How much does income protection cost?

The cost for this type of life insurance will vary depending on provider, policy choices and personal factors, but you can generally expect to pay about 1-2% of your salary. Based on a salary of $45,000, we estimate that an income insurance policy will cost about $42 per month, however this is based on a number of variables.

Who should take out income protection cover?

Income insurance helps protect you in the event that you cannot work, making it a good option for people who:

  • Are self-employed or whose business is reliant on their ability to perform work
  • Are buying a house and want to be able to keep up with the mortgage
  • Have existing financial obligations
  • Have a family or loved ones who rely on their income
  • Work higher risk jobs
  • Want to eliminate money worries to focus on recovery

How to compare income protection?

Life Insurance Comparison is able to offer you income protection quotes. Simply call us or fill in this online form to have a specialist generate quotes for you.

Trauma cover

What is trauma cover insurance?

Also known as critical illness insurance, trauma insurance is a type of life insurance that can protect you in the event that you suffer a serious medical condition like cancer, heart attack or stroke. If you develop an illness or condition that’s covered in the policy, this type of cover provides a one-time payment to help you pay medical costs, debts and bills.

How does trauma insurance work?

As you know, trauma insurance is designed to protect you if you face a serious trauma, as it pays out a lump sum to help you cover bills. Once you are diagnosed, you will usually need to wait about 14 days before you become eligible to receive your benefit. Here’s what is usually covered:

Standard cover for trauma or critical injury insurance generally protects against 30-43 conditions including the following:

  • Cancer
  • Heart attack
  • Coma
  • Stroke
  • Benign brain tumor
  • Chronic lung disease
  • Time in intensive care

Comprehensive trauma insurance can provide additional cover for up to 15 more conditions such as:

  • Melanoma
  • Diabetes complications
  • Partial blindness
  • Partial loss of hearing
  • Carcinoma
  • Osteoporosis

Trauma insurance cover exclusions

As with most types of life insurance, there are a few common trauma insurance cover exclusions:

  • Pre-existing conditions
  • Self-harm or suicide
  • Illness or medical condition not covered by your policy

Pros and cons of trauma cover

Pros

  • Policy options. Choose from standard and comprehensive cover along with optional extras, adjustable cover amounts and more.
  • Affordable. Trauma insurance is generally much cheaper than standard term life insurance.
  • Lump sum. In the event of a claim, you’ll receive a lump sum payment that can help you pay medical bills, supplement lost income and more.
  • Broad cover. Most policies protect against upwards of 30 or more diseases and illnesses.
  • Tax-free payout. If your claim is approved, the payout will not be subject to tax deductions.

Cons

  • Waiting period. Once diagnosed, you’ll need to wait 14 days before becoming eligible for your benefit payout.
  • No death cover. This type of life insurance doesn’t provide a payout if you die, unless it is linked to your existing term life insurance policy.
  • 90-day exclusion period. To prevent people from taking out cover and making claims for conditions they already have, most claims will not be paid if the condition occurs within 90 days of the start of your policy.
  • Not available through super. Unlike most other types of life insurance, trauma cover is not available through super.
  • Not tax deductible. Premiums for this type of life insurance are not tax deductible.

How much does trauma cover cost?

The cost of trauma cover will depend on a number of personal factors like your medical history, age and current health, but costs can also vary depending on the provider and policy. That being said, the average cost of trauma insurance is roughly $22.50 per month based on 10 quotes for a healthy 35 year old male with $100,000 of cover and no pre-existing conditions.

Who should take out trauma cover?

While you may be in good health now, the probability of critical illness increases as you age, so trauma insurance can help provide financial protection. It’s generally best suited for people who:

  • Have a history of illness in their family
  • Don’t have comprehensive health cover
  • Have existing financial obligations like debts or a mortgage
  • Would struggle to cover medical expenses in the event of a trauma or critical illness

Key person insurance

What is key person insurance cover?

Key person or key man insurance is a life, trauma and disability insurance policy that protects businesses from the loss of an important employee. If there are any losses resulting from disability due to accident or illness, inability to work or death of that employee, the policy will pay benefits to the business. There are three main types of policies:

  • Revenue protection
  • Capital protection
  • Buy/Sell agreement

How does key man insurance work?

Unlike the other 4 types of life insurance, this type of insurance is designed to protect businesses rather than individuals. Policies can be taken out on anyone who is essential to the success of the business as long as they meet the insurer’s eligibility criteria. This often includes directors, CEOs, business partners, salespeople, essential technicians and more. Regardless of who the policy is taken out on, key man insurance has a number of different applications:

  • Cover loss of revenue generated by the key person
  • Pay the cost of sourcing and training new employees
  • Fund the purchase of shares of exiting employee
  • Cover existing business debts of the key person
  • Replace potential earnings lost from important clients, suppliers and contacts from the key person

Key man insurance cover exclusions

Like any other type of life insurance, there are a few situations that are often not covered by key man insurance policies:

  • Fraud
  • Intentional dishonesty
  • Misrepresentation
  • Suicide that occurs within the contestable period (the first two years after your policy begins)

Pros and cons of key man insurance

Pros

  • Lump sum payout. In the event that a claim is approved, the business will receive a lump sum payment that can immediately help the company get back on track.
  • Policy options. Businesses can choose from a wide range of policy and cover options to get the protection they need.
  • High cover limits. The loss of a key person can have a huge impact on revenue. This type of insurance has high cover limits to help businesses restore capital after an incident.
  • Broad cover. Depending on the policy, this type of cover can help pay off debts, retain shares, attract new talent and much more.

Cons

  • Exclusions. As with any type of insurance, there are some exclusions that could prevent claims from being approved. Check PDS to find out what is and isn’t covered.
  • Few tax deductions. Unlike some other types of insurance, most policies are not eligible for tax deductions on premiums.
  • Eligibility requirements. Providers have strict eligibility requirements based on the employee’s contributions to the business, ownership status and more.
  • Price. Key man insurance is much more expensive than the other types of life insurance since the potential benefit payout is much higher.

How much does key man insurance cost?

Who should take out key man insurance?

Key man insurance is not suited for personal use as it’s designed to protect businesses. It protects against many different situations, making it ideal for people that:

  • Generate significant revenue for the business
  • Are essential to the operation
  • Have existing debts or loans that could be transferred to the business
  • Hold shares that would otherwise be given to family
  • Would be inconvenient or expensive to replace and train
  • Have expertise, connections or contracts that would be difficult to replace

Bottom line

There are 4 main types of life insurance in Australia, plus key man insurance for businesses. Each of these types of insurance have different applications and benefits, so the best policy will depend on your situation. Read up on the 4 types of life insurance in Australia to find out what type of cover is best for you

FAQs

Are there taxes on tpd lump sum payout?
In most cases, lump sum life insurance payouts are not subject to income tax.

Does TPD cover depression?
Many mental health issues are not covered by insurance policies, so it is not likely that you would receive a payout if you were unable to work due to depression.

What is a beneficiary and who should you choose as yours
A beneficiary is a person who is designated to receive the payout of an insurance policy. Many people choose family members as beneficiaries, but you can designate whoever you would like.

Do I need trauma cover if I have health insurance?
Trauma insurance can provide additional cover beyond your health insurance policy. While it isn’t necessary, it can provide peace of mind.

Key man insurance eligibility criteria
In order for an employee to qualify for key man insurance cover, they will need to meet a few eligibility requirements:

  • The individual should hold less than 51% of the company’s shares.
  • The individual and their family should hold less than 70% of the company’s shares
  • Proof that the proposed employee plays a critical role in the business of the company

Is key man insurance tax deductible?
Key man life insurance premiums are generally not tax-deductible. However, there are some situations where it can be, like in the event that the premiums are considered part of the insured employee’s taxable income.

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