How does life insurance work?

Firstly, what is life insurance?

“Life insurance” is the general term we give to the range of insurance that looks after you if something unexpected happens to your body or mind.   

They are designed to protect your quality of life and the future you’ve planned for your loved ones.  

The category of life insurance includes: 

• Life Insurance (sometimes called term life insurance or death cover) 
• Total Permanent Disability Insurance
• Critical Illness Insurance, and
• Income Protection Insurance.

Note: Most people have only heard of the product “life insurance”, so this has become the accepted term for the category also. 

Step 1. Which type of insurance do you need?  

Each insurance protects your life in a different way. So the first thing to consider is, which types of insurance do you need to help you live the life you’ve planned?

• Life Insurance: If you want to protect your family’s future and give them options if you die or are diagnosed with a terminal illness, then that’s Life Insurance.
• Total Permanent Disability Insurance: To help you live a better quality of life if you become permanently disabled and can’t work, then Total Permanent Disability (TPD) Insurance could be for you.
• Critical Illness Insurance: If you have a serious illness like cancer, then Critical Illness Insurance helps support you while you recover.  
• Income Protection Insurance: If you want to have an income to pay your living expenses, if you can’t work as the result of an illness or injury, then that’s what Income Protection Insurance is for.  

Step 2. How much do you want to be insured for?

Everyone’s life and budget is different. So considering how much you want to be insured for is an important step. 

Someone with all four types of insurance will normally have a higher amount of Life Insurance cover, followed by TPD and Critical Illness Insurance. These insurance types are paid as lump-sums. E.g. For Life Insurance your loved ones could receive a $1 million Life Insurance payment if you die.  

Income Protection Insurance is a monthly cover amount. E.g. You could be insured for a monthly payment of $5,000 if you can’t work as a result of injury or illness. 

Our Life Insurance Specialists  are here to answer any of your questions. Or, use our Cover Calculator  to work out a cover amount for your life.

Step 3. If you choose Income Protection Insurance, how long do you want your Waiting and Benefit Periods? 

A Waiting Period is the length of time you have to wait after an injury or illness, before you start accruing Income Protection Insurance benefits. It could be 4, 6 or 13 weeks (shorter Waiting Periods generally cost more in premiums.)  

A Benefit Period is the maximum length of time you could receive your Income Protection Insurance payments. It could be between 1 and 5 years. (The longer your Benefit Period the higher your premium.) 

Step 4. How do you want to structure your policy?

To get the insurance plan that’s right for you, you should also consider how best to structure your policy. 

Some of the things to consider are:

Stepped vs. Level Premiums

Stepped Premiums mean that the amount you pay in premiums increases each year as you get older. Stepped Premiums are recalculated based on your age at each Policy Anniversary. This generally means your premium rate will start lower than the Level Premium structure, but will go up each year as risks increase.

Level Premiums can give you more certainty on the future cost, especially if you’re planning to keep your Cover for many years. The premium is based on your age at the start of the Policy. Premiums can increase if you have chosen to apply CPI to your Policy. Premiums can also increase if you make changes to you Policy or if we increase the premium rate across all policyholders. Level Premiums end at the Policy Anniversary before age 65 and will change to the corresponding Stepped Premium for your age until your Policy expiry.

Standalone vs. Bundled Cover 

There are a number of different ownership options available depending on the Plan you choose. The different types of ownership determine how the premiums are funded and may have different tax implications in respect of the premiums and benefits paid. 
The Plans structures available are: 

• Standalone: A claim paid under a Standalone Plan will not reduce the Benefit Amount of another Standalone Plan.
• Attached/Attaching: When a Plan is Attached to another Plan, a claim paid under a Plan will reduce the Benefit Amount on all other Plans that it is Attached to. All Attached Plans have the same Policy Owner(s) and are issued under one Policy. 

Step 5. Enjoy This Australian Life

The most important question to ask yourself is, how will life insurance help you protect those you love or assist your return to wellness, so you can continue to make the most of This Australian Life?