What is Life Insurance and How Does it Work?
The most common type of cover is life insurance (term life insurance). A life insurance policy will pay a lump sum to your estate or specific beneficiaries in the event of death or, in some cases, on the diagnosis of a terminal illness.
The advantage of life insurance is peace of mind that your death will minimise any financial hardship for your loved ones. Cover can pay off debts, provide an income for dependents, cover funeral expenses and generally assist in maintaining your family’s lifestyle in the event of your death.
Included Benefits
Death Benefit – The benefit amount is payable when the insured passes away
Terminal Illness Benefit – The benefit amount is payable when the insured is diagnosed as Terminally Ill. The definition/life expectancy for claiming under this benefit varies with different insurance providers.
Depending on the provider, otherfeatures are available.
What does Life Insurance Protect?
People will normally take out Life cover to help cover a range of expenses/funding needs for the beneficiaries including:
- Debts
- Replacing any income to ensure spouse’s living expenses needs are provided for
- Paying for final costs (most notably Funeral Expenses)
- Ensuring that any children’s education expenses are provided for.
It is also important to consider current assets and expected future income when considering cover.
Premium Types
Stepped and Level premiums are available for Life Cover.
Funding Options
Life Cover is available both inside and outside of super (including SMSFs)
How are Life Insurance claims paid?
Upon passing or terminal illness, the insurance policy’s beneficiaries contact the insurer to notify them of the passing. This begins the claims process. If the cover is owned outside a superannuation environment, the insurance provider will pay the proceeds to the selected beneficiaries of the insurance policy, or if no beneficiaries are elected, the benefits are paid out to the estate. Life insurance held inside superannuation forms part of the overall superannuation benefit. With superannuation benefits, tax may be payable if the benefit is paid to someone who is not a death benefit dependent under tax laws (such as adult children). Read our Superannuation Death Benefits guide here.
Are there exclusions on Life Insurance?
Typically, the most common Life insurance exclusion is for death arising from intentional self-inflict within 13 months of the policy start. However, this may differ between insurance providers. You will need to refer to the PDS’s of insurance providers for automatic exclusions of life insurance.
When applying for life insurance through a retail provider, you will need to complete an application form providing both personal and medical information so that the underwriter can assess the application. They may also request further medicals and/or reports. Depending on your health, they may ask you to pay an additional premium, known as a loading. In some cases, the life insurance company may apply a medical exclusion to your policy. For example, a decision may be to not cover you for high-risk activities or a pre-existing injury/illness. This would mean that if an event occurs where there is an applicable exclusion, the benefit under the policy is not payable.
Other insurance covers you may wish to consider include TPD, income protection and trauma insurance.
Protecting your family and lifestyle in the occurrence of an unforeseen event is a crucial step in managing risk to your financial well-being. Read about our insurance services here.