How To Buy Life Insurance In Australia

A report released in 2018 by ASIC (Australian Securities & Investment Commission) found that the majority of Australians that purchased direct life insurance (that is, insurance without personal advice) actually knew little or nothing about their available options¹. 38% of the respondents took out insurance in response to a major life event, such as the birth of a child, or getting married. They carried out little to no research beforehand and largely did not know what each life insurance product covered.

Finding suitable cover for your needs is in your best interest, so if something does go wrong, you understand which expenses may be taken care of for you and your family. 

What are the different types of life insurance?

Life insurance may be sold as a single product, or can be the umbrella term for a combination of different types of cover. We’ve put together a brief description of the types of life insurance available as well as some conditions that may come with each.

Life cover/term life cover:

Life insurance (also known as term life insurance) pays a lump sum should the insured person pass away, subject to policy limits due to an illness or accident. Before you enter into a policy agreement, check if any exclusions apply. For example, you may not be covered if you have any specified pre-existing medical conditions.

Accidental death cover:

This differs from life cover because it pays a set amount if the insured person dies due to an accident only, rather than an illness.

TPD cover:

Total and Permanent Disability cover (TPD) exists in case the policy holder becomes permanently disabled and is unlikely to ever work again. Depending on the definition on the policy, you may be covered if you’re unable to work in any occupation, or you may only be covered if you can’t work in your usual occupation.

Trauma cover:

Trauma cover provides set payments if the insured person is affected by a specified illness or injury, including but not limited to cancer, heart attack and strokes.

Income protection

If the policy holder is unable to work due to an injury illness or accident, income protection insurance generally replaces up to 75% of your gross annual income lost as a result².

Consider your life stage when purchasing life insurance

The type of life insurance you should buy depends on your personal circumstances and, what may be suitable for one person, might not suit another³. Consider the stage of life you’re currently at, looking especially at your age and number of dependents, to determine your goals and expectations when it comes to getting cover.

• Young and single: You may not have thought about life insurance just yet, but it may be worthwhile to consider how you’d financially sustain your lifestyle if you become sick or injured. Income protection, Trauma and TPD could cover you if this were to happen
• Young couples: With major life events on the horizon, you may be looking for ways to preserve you and your partner’s lifestyle. Consider how your partner would pay the mortgage and other debts if you were gone
• Young families: As a young family, your responsibilities and priorities will have changed dramatically. Life insurance could ensure your family is well taken care of and would continue to be protected if you were no longer around
• Older families: A life insurance policy could help protect your wealth and provide that extra peace of mind as you get older

While you may have a level of life insurance through your super fund, this can be limited⁴. Find out what you’re already covered for before you buy life insurance. You can also learn more about life insurance for families here.

Choosing a suitable level of cover and enjoying peace of mind

Despite the benefits, there is still some resistance amongst Australians to take out life insurance, with 37% of Industry Super Fund members saying it’s a low priority compared to other financial commitments⁵.

However, having a suitable level can ensure your family are able to keep up with financial commitments if you were to pass away. A simple equation can calculate how much life insurance is sufficient.

Summate your current and future financial obligations, and take away any existing resources you have, such as savings and assets. The number you’re left with is a general indication of the amount of life insurance you may require. 

Should you purchase a single product, or bundle several into your policy?

The types of life insurance explained above can usually either be taken out as separate entities or be “bundled” into a single plan. You may receive a discount if you choose to combine products and their cover amounts but if you do make a claim on a bundled plan, this may affect your total benefit. On the other hand, if you have a number of standalone products and make a claim on one policy, it will not affect the others.

The decision of whether to combine products should depend on your individual circumstances. While bundling may be more convenient and possibly even cheaper, making a claim affects all combined products and may reduce the amount that’s paid.

What is the Life Insurance Code of Practice?

The Life Insurance Code of Practice was established to protect consumers and ensure they receive reliable services of a consistently high standard from their insurance provider⁶. In short, the Code binds companies issuing life insurance products to a set of rules, including being fair and transparent, ensuring sales are appropriate and keeping customers informed during the claims process.

It is designed to offer peace-of-mind to those taking out life insurance.

Sources:
1. https://download.asic.gov.au/media/4852980/rep588-published-30-august-2018.pdf
2. https://www.moneysmart.gov.au/insurance/life-insurance/income-protection/
3. https://www.moneysmart.gov.au/insurance/life-insurance/life-cover/
4. https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/insurance-through-super/
5. http://www.lifewise.org.au/see-more-statistics/
6. https://www.fos.org.au/about-us/codes-of-practice/life-insurance-code-of-practice/