How does life insurance work?

Just as you would insure your car to protect it in the event of an accident, life insurance allows you to insure not only yourself, but also the way of life you create for you and your family.

Here are the seven key things that you need to know about life insurance and the steps you can take to get covered.

  1. What does life insurance provide?

    Life insurance provides a lump sum or on-going payment in the event of death, serious illness or permanent disability. This lump sum allows households to maintain an existing lifestyle by helping to pay off a mortgage, cover current and future living expenses, and replace income.

  2. What types of life insurance are available?

    The types of policies vary depending on the needs of the individual, you can choose from one or a combination of the following.

    Life insurance: Life insurance pays your family or estate a lump sum amount when you die.

    Income protection: Income protection is a type of insurance designed to replace your income if you are unable to work through illness or injury.

    Critical illness insurance: Critical illness insurance pays you an agreed amount if you are diagnosed with a specified critical illness, such as cancer or heart disease.

    Total Permanent Disability (TPD) insurance: TPD insurance gives you a tax-free lump sum if you're permanently unable to work due to accident or illness.

  3. How much gets paid out?

    Payments will vary depending on the amount you are covered for and the type of insurance you are claiming. A typical life insurance policy can pay in the areas of $500,000 to $1.5m. While income protection can provide up to 75% of your usual salary over the time you are unable to work.

  4. How much does it cost?

    Just like other types of insurance, life insurance policyholders pay a monthly premium. All policies are evaluated on a case-by-case basis and premiums are assessed on factors such as medical history, past claims and level of cover.

  5. What types of premiums are there?

    There are two common types of premium structures available with life insurance policies:

    Level Premiums: Level premiums start at a higher rate compared to stepped premiums, but will stay at the same level until the age of 65 or 70, at which point they will switch to a stepped premium.

    Stepped Premiums: Stepped premiums start at a lower point and will increase over time relative to your age.

  6. How to claim on a policy?

    In the event that you need to claim on a policy, the first step will be to contact your insurer. This can be directly through the insurer or through an adviser. Each insurer’s process will vary, but in most cases the next step will be to fill out claims forms and have a case manager appointed who will assess you claim.

  7. How do I get life insurance?

    There are four ways in which to take out life insurance: from a financial advisor, through your super fund or employer or direct from an insurer. The one most suited to you will depend on your preference and circumstances.

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