Choosing Life Insurance: Australia's Essential Guide

Life insurance is a crucial consideration for many Australians, providing peace of mind and financial security for loved ones in the event of your death or terminal illness. When choosing a life insurance policy, it's important to consider your personal circumstances, budget, and the level of cover required. Here are some key factors to keep in mind when selecting a life insurance policy in Australia:

- Type of Policy: Life insurance can be categorised into term life insurance, whole life insurance, and group life insurance. Term life insurance covers you for a specific period, while whole life insurance provides coverage for your entire life. Group life insurance is typically offered through your superannuation fund or employer and may not be tailored to your specific needs.

- Level of Cover: Estimate the amount of cover you need by considering your income, financial obligations, and the future needs of your dependents. Online calculators or the formula (annual salary) x 10 can assist in determining an appropriate level of cover.

- Cost and Premiums: Evaluate the cost of premiums and whether you prefer “stepped premiums” that increase over time or “level premiums” that start higher but increase more slowly. Consider the affordability of premiums now and in the future.

- Exclusions: Understand any exclusions or waiting periods in the policy. Life insurance typically doesn't cover suicide or risky activities, and there may be other specific exclusions depending on the provider.

- Optional Extras: Some policies offer additional cover options such as serious illness insurance, total and permanent disability insurance, or income protection insurance. Consider if you need these extras and how they might impact the cost.

- Provider Reputation: Research the reputation and financial strength of the insurance provider. Reviews and customer feedback can provide valuable insights into their claims process, customer service, and overall experience.

- Payment Methods: Some providers offer discounts if you pay premiums annually or if you bundle multiple policies together. Consider the frequency and methods of payment that work best for you.

- Application Process: Direct life insurance allows you to purchase a policy directly from the insurer without a third-party agent. This option requires independent research but ensures a policy tailored to your needs. Alternatively, you can use an insurance agent or financial advisor to guide your decision.

Understand the different types of life insurance

Life insurance is an umbrella term for a range of insurance types. The most common types of life insurance in Australia include:

Life Cover or Term Life Insurance

Life insurance or life cover is the most common type of life insurance. It provides a lump-sum payment to your dependents in the event of your death or, in some cases, an early payment if you're diagnosed with a terminal illness. The amount of the lump sum varies, but it can be as much as $1 million, depending on your age. The general entry age requirements are 18 to 79 years.

Critical Illness or Trauma Insurance

Critical illness insurance, also known as trauma insurance, provides cover for serious medical issues, such as cancer, a heart attack, stroke, or a severe injury. It pays out a lump sum to help cover treatment costs and allow you to focus on your recovery. This type of insurance can usually be purchased as a standalone policy or as an add-on to a term life insurance policy. The general entry age requirements are 18 to 64 years.

Total and Permanent Disability (TPD) Insurance

TPD insurance covers you if you become permanently disabled due to an injury or illness and are unable to work again. It provides a lump sum payment to help with medical costs, rehabilitation, and living costs. There are two types of TPD insurance: "own occupation," which covers you if you are unable to perform the specific requirements of your current job, and "any occupation," which covers you if you are unable to work in any occupation suited to your education, training, and experience. The general entry age requirements are 18 to 64 years.

Income Protection Insurance

Income protection insurance provides financial support if you are unable to work due to illness or injury. It pays a proportion of your standard income, usually up to 70% or 85%, during the period you are unable to work or until the end of the benefit period, whichever comes first. This type of insurance helps you maintain your lifestyle and cover expenses during a health-related setback. Income protection insurance usually has a waiting period before payments begin, ranging from 30 to 90 days.

Funeral Insurance

Funeral insurance is designed to help cover the costs of your funeral and other final expenses, such as estate fees. It provides a lump-sum benefit to your family when a claim is made. Funeral insurance offers a limited cover amount and is not designed to cover ongoing expenses.

Compare life insurance providers

When comparing life insurance providers in Australia, it's important to consider several factors to ensure you find the best fit for your needs. Here are some key areas to focus on when making your decision:

• Types of Coverage Offered: Different life insurance providers may offer varying types of coverage. The main types include term life insurance, whole life insurance, group life insurance, and income protection insurance. Term life insurance covers you for a specific period, while whole life insurance provides coverage for your entire life. Group life insurance is typically offered through an employer or superannuation fund, and income protection insurance replaces a portion of your income if you're unable to work due to injury or illness. Consider which type of coverage aligns with your needs.
• Benefits and Add-ons: Life insurance policies often include additional benefits or add-ons that can enhance the value of your policy. These may include terminal illness benefits, funeral advancement benefits, financial advice benefits, premium freeze options, and interim cover. Compare the benefits offered by different providers to see which ones are most relevant and valuable to your situation.
• Cost of Premiums: The cost of premiums can vary significantly between providers. Compare the monthly or annual premiums charged by different insurers, considering your budget and the level of coverage you require. Also, look into whether the premiums are stepped or level, as this will impact how the cost changes over time.
• Waiting Periods: Waiting periods, also known as waiting times, refer to the time you need to wait before you can claim benefits. These can vary among insurers and different types of life insurance, so be sure to review this information carefully. Choose a policy with a shorter waiting period to ensure quicker access to benefits if needed.
• Exclusions: All life insurance policies have exclusions, which are situations or events that are not covered. Carefully read the fine print and understand what is excluded from coverage, such as pre-existing conditions, high-risk activities, or suicide. Knowing the exclusions will help you make an informed decision and avoid surprises during the claims process.
• Claims Process: Understanding how the claims process works is essential. Look into the average time it takes for insurers to process and pay out claims. Also, consider their dispute rates, as lower dispute rates typically indicate smoother and more efficient claims handling.
• Financial Strength: Assess the financial strength of the insurance provider by reviewing their financial strength ratings. This will give you an idea of their ability to pay out claims in the future and manage financial risks effectively.
• Customer Reviews: Don't underestimate the power of customer reviews. Reading reviews and testimonials from real customers can provide valuable insights into their experiences with the insurer, including their claims process, customer service, and overall satisfaction.
• Built-in Benefits: Some life insurance providers offer built-in benefits or "add-ons" with their policies. These can include terminal illness benefits, funeral advancement to help cover funeral expenses, financial advice benefits, and premium freeze options that prevent premium increases for a certain period.
• Discounts and Rewards: Many life insurance providers offer discounts and rewards to attract customers. Look for insurers that offer discounts for purchasing multiple policies, paying premiums in advance, or bundling different types of insurance together.
• Underwriting Efficiency: Consider the efficiency of the insurer's underwriting process, especially if you have unique circumstances that require customised coverage. An efficient underwriting process can lead to quicker approvals and more tailored policies.

Assess your financial situation

When choosing a life insurance policy, it is important to assess your financial situation and ask yourself the following questions:

Calculate your debts, including your mortgage, credit card balance, and any other loans. Consider how much life insurance cover you would need to pay off these debts in the event of your death.

Consider your monthly expenses, such as utility bills, groceries, and rent or mortgage payments. Estimate how much life insurance cover your family would need to maintain their current standard of living if you were no longer around.

If you have people who rely on you financially, such as children, a spouse, or parents, you may want to ensure they are provided for in the event of your death. Consider the cost of raising children, education fees, and supporting your spouse's retirement.

Your income will determine how much you can afford to pay in life insurance premiums. It will also impact the level of cover you need, as a higher income may mean higher living expenses.

Some pre-existing medical conditions may affect your insurance claims or your ability to purchase life insurance. Be sure to disclose any medical conditions during the application process to avoid issues with your policy later on.

If you have existing life insurance through your superannuation fund or another source, consider whether this provides sufficient cover for your needs. Review the terms and conditions of your existing policy to determine if you need additional cover.

By assessing your financial situation and considering these questions, you can make a more informed decision about the level of life insurance cover you require and choose a policy that best suits your needs.

Consider optional extras

When choosing life insurance in Australia, there are several optional extras that you may want to consider adding to your policy. These extras can provide additional financial protection and peace of mind, ensuring that you and your loved ones are taken care of in the event of an accident, injury, or illness.

One common optional extra is total and permanent disability (TPD) insurance. This type of cover provides a lump-sum payment if you become totally and permanently disabled and are unable to work. TPD insurance can help you cover the cost of medical expenses, home modifications, and loss of income, ensuring that you can maintain your quality of life even if you're no longer able to work.

Income protection insurance is another optional extra that can provide a financial safety net. It replaces a portion of your income, typically up to 75%, if you're unable to work due to injury or illness. This regular income stream helps cover your day-to-day living expenses, such as mortgage payments, rent, or utility bills. It ensures financial stability during challenging times and continues until you're able to return to work or the policy ends.

Trauma insurance is also worth considering as an optional extra. It provides a lump-sum payment upon diagnosis of a specified serious illness or injury, such as cancer, heart attack, or stroke. This financial support allows you to focus on your recovery without worrying about medical expenses or loss of income. You can access the best available treatment and cover any associated costs, including travel for specialised care or home modifications.

Additionally, if you're self-employed or a business owner, business expenses insurance is an important consideration. This optional extra covers your business-related expenses, such as rent, salaries, or utility costs, if you're unable to work due to injury or illness. It ensures that your business can continue operating and helps alleviate the financial strain during your recovery period.

By including these optional extras in your life insurance policy, you gain enhanced financial security and protection for yourself and your loved ones. While they may come at an additional cost, the peace of mind they provide is invaluable. These extras ensure that you're comprehensively covered for a wide range of scenarios, allowing you to maintain your quality of life and focus on what matters most during difficult times.

Read the fine print

When it comes to choosing life insurance in Australia, it's important to read the fine print carefully. Here are some key points to consider:

Exclusions and Restrictions

Insurers are required to specify any exclusions, waiting periods, definitions, expiry dates, and policy limits in the Product Disclosure Statement (PDS). Be sure to read this document thoroughly to understand what is and isn't covered by the policy. For example, life insurance typically doesn't cover suicide or risky activities, and there may be exclusions for pre-existing medical conditions.

Understand the Claims Process

Life insurance claims can be complex and time-consuming. Look for companies that prioritise good customer service and efficient claims processing. Independent online reviews can be a helpful resource to learn about other customers' experiences with the claims process.

Additional Features and Benefits

Consider any additional features or benefits offered by the insurer. For example, some policies may include terminal illness cover, funeral advancement benefits, financial advice benefits, or premium freeze options. These add-ons can provide valuable financial support during difficult times.

Understand the Financial Strength of the Insurer

Financial Strength Ratings can provide insights into the creditworthiness and reliability of an insurance company. This is an important consideration, especially if you're purchasing life insurance for long-term financial security.

Read Customer Reviews

Customer reviews offer valuable insights into the quality of an insurer's products and services. By reading reviews, you can learn about real-life experiences, including the claims process, customer service, and any unspoken details about specific policies.

Understand the Underwriting Process

The underwriting process is used by insurers to evaluate the risk of insuring your life. Be prepared to answer questions about your health, lifestyle, medical history, family medical history, travel plans, residency status, and whether you engage in any risky activities. This information will impact the insurer's decision to offer you a policy and the terms of that policy.

Frequently asked questions