How Does Life Insurance Work In Australia: A Complete Guide

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Students want to know how much life insurance in Australia costs and how it works.


Life is unpredictable and constantly changing. Have you considered how your family would cope if you became ill or injured financially?


Life Insurance is one of the best investments to help protect you and your family and secure your finances. It provides financial support for illness, injury, serious illness, or even death.


Do you need help with the concept? This guide will make it easier for you to understand what life insurance covers, its pros and cons, and what to consider when buying one.


With the proper understanding, you are in a better place to choose the protection to help you and your family financially when facing any unfortunate event.



1. What Is Life Insurance In Australia?


Life insurance is a legal agreement between a policy owner and an insurer that assures the insurer will pay a lump sum to listed beneficiaries. It happens when the insured dies or has an illness that can cause his death within 12 months.


Based on your policy and insurance provider, you can use this payment to pay off loans, pay funeral costs, and meet future financial needs such as childcare, day-to-day living expenses, school fees, etc.


This way, life insurance secures your family's financial future and provides them with options when you are no longer around.


The proposer must accurately disclose his past and present health conditions and any high-risk activities he is involved in to get the policy benefits. For the policy to stay active, the policyholder must pay at least one premium upfront or regular premiums over time.



2. How Does Life Insurance Work?


A life insurance policy agreement states that a lump sum payment is paid to the named beneficiaries if the policyholder dies or a terminal illness is detected. These include children, parents, spouses and siblings.


In this way, it can help take care of the financial uncertainties of your dependents they are likely to endure when you are no more around. It is vital to consider your present and future financial needs to determine a suitable life insurance cover.


A life insurance policy comprises two key components — premium and death benefit. Where the term life insurance has both components, whole life and permanent insurance policies have a cash growth component.



Death Benefit


It is the amount the insurance company agrees to pay the beneficiaries of the insured's death. The insured chooses the death benefit amount, calculating how much the beneficiaries would need in the future. 


The insurance company assesses underwriting requirements such as age, gender, health, lifestyle, life expectancy, medical history, occupation, policy, and cover type. They do this to decide whether the applicant qualifies for the desired death benefit coverage. 





It is the money policyholder pays to the insurer to make use of the death benefit when he dies. The insurer decides the premium amount after assessing the life expectancy based on the above factors. 


Old age, unhealthy lifestyle, low life expectancy, high-risk activities, or permanent policies that build cash value can result in higher premiums.



Cash Value


The cash value of life insurance gets accumulated with time on a tax-deferred basis. The policyholder can use this benefit to pay premiums or buy more insurance policies. 


However, some insurers may impose restrictions on using the policy's cash. Any outstanding loans against the cash value can lower the policy's death benefit.



3. What Does Life Insurance Cover?


Life insurance covers death due to the following event:


  • Accidents

  • Natural causes

  • Medical complications

  • Acts of violence


Life insurance also covers terminal illnesses. When the doctor diagnoses the disease, it will cause death in less than 12 months. Usually, suicide doesn't include suicide for a set period.


In addition to the above, you should read the Product Disclosure Statement to get accurate information concerning specific exclusions and limits of your policy.



4. Who Should Get Life Insurance?


Life insurance provides financial assistance to surviving dependents after the death of the insured policyholder. 


Here are a few examples of people who may require life insurance:


  • Singles – to sustain their lifestyle when they become sick or injured.

  • Couples – to protect your mortgage payments and secure your wealth by planning for family expansion

  • Young Families – to protect your young family's needs and secure their future

  • Maturing Families – Securing your wealth as household income increases as children age.

  • Established Families - to protect your wealth from the unexpected.

  • Parents with adult children (who have special needs)

  • Adults who have jointly taken a property on loan

  • Children or young adults (as the policy premiums are low at a younger age)

  • Stay-at-home spouses (for their significant economic value depending on the work they carry out in the home)

  • Wealthy families that are supposed to owe estate taxes

  • Families who can't afford funeral and burial expenses

  • Businesses with major employees

  • People with pre-existing health conditions such as cancer, smoking, or diabetes.



5. Types Of Life Insurance


Many people think that life insurance only covers you only when you die. On the contrary, it comes in various types to meet your circumstances and needs. This includes an accident or poor health that takes away your ability to work permanently or for some duration.


Life insurance comprises four different types of insurance that help your loved ones cope with financial losses.


  • Life Insurance

    • Term Life Insurance

    • Permanent Life Insurance

  • Trauma Insurance

  • Income Protection Insurance

  • Total and Permanent Disability Insurance 


Choosing a higher level of cover will cost you more but offers you a broader range of financial protection.



Term Life Insurance


The term life insurance pays a death benefit only when the policyholder dies before the end of the term. The policy expires after a fixed number of years, or the policy term such as ten years, 20 years, or 30 years. 


The best term life insurance is the one that is affordable and offers long-term financial strength. Most insurers also offer "Convertible term life insurance" that allows policy owners to convert their term policy to permanent insurance.


Renewable term life insurance is one of the types of term life insurance renewed yearly with an increase in the premium. They are usually the most in-expensive term insurance at the start.



Permanent Life Insurance


As the name implies, the insurance remains active for the policyholder's whole life until the insured dies, surrenders the policy, or stops making premium payments. 


Compared to term insurance, permanent life insurance is expensive as it builds a cash value over time and covers a person's entire life.



Total And Permanent Disability Cover


This type of coverage pays a lump sum in case of acute injury or permanent disablement. You can use this money for living costs and rehabilitation if you become disabled and can't work in your present job or any occupation. 


You can take TPD cover as an individual product or with a life insurance policy.



Trauma Cover


Trauma cover, called "critical illness cover" or "recovery cover", covers you when detected with a terminal injury or illness. These include heart disease, cancer, stroke, a head injury, or other life-threatening conditions. 


In medical circumstances, the insurer pays a lump sum to the policy owner.



Income Protection


Income protection cover comes in three types: standard income protection, redundancy cover, and mortgage protection insurance. 


These levels of cover protect your flow of earnings in cases when you are not in the capacity to work due to injury or illness.


  • Mortgage protection insurance helps homeowners who have taken a loan from a mortgage lender. The policy covers their mortgage payments and protects them against the risk of default. It is applicable for both housing and commercial estates. In the event of an accident or illness, the policy helps your family make the mortgage payments when you can't pay for them. 


  • Redundancy covers up to 70% of your pre-tax monthly income for a specified period if you get ill, injured, or unexpectedly unemployed.



6. What Is Whole Life Insurance?


Whole life insurance is a form of permanent life insurance that gains cash value. It covers a policy owner's entire life, not just a specific duration.


The policyholder can use the cash for various purposes, such as debt repayment, paying policy premiums, etc.


However, after introducing compulsory superannuation in 1992, whole life insurance was no longer sold in Australia. It was replaced by term life insurance in Australia.



7. Benefits Of Life Insurance:


Here are some compelling features and protections you can get by taking out life insurance:


  • Insurance is not just for the affluent and healthy, with many insurers in the market. It has become affordable to buy one that suits your needs.

  • It gives you comfort and peace of mind that you and your family are financially protected.

  • Protects your income and assets if anything unplanned happens

  • Allow you to continue repaying dues, bills, and other immediate financial needs without issue.

  • Tax-free payouts (Dividends and death benefits

  • Opportunities for growth in cash value 

  • It helps minimize one's tax liability. 

  • Covers funeral expenses 

  • Supplement retirement savings by offering cash value along with death benefits

  • Takes care of living expenses

  • Lower premiums when you are young



8. Drawbacks Of Life Insurance


Do you think life insurance is all good? Check out the below pointers before you decide to buy one.


  • You need to keep paying monthly premiums even if nothing major happens for many years 

  • Payouts are not guaranteed

  • The long claims settlement process 

  • You don't have coverage for various things mentioned under "Exclusions" in the policy. 

  • Though term life insurance is the cheapest but covers only a specific period

  • Premiums increase with age. The older you get, the harder it gets to find an affordable policy

  • Premiums are higher for those involved in high-risk hobbies, occupations, and activities 



9. What Is The Average Life Insurance Cost In Australia?


The life insurance price depends on the following factors such as:


  • Age (As you age, the policy premium increases as the likelihood of making a claim increases)

  • Present health condition (Poor health attracts higher life insurance costs)

  • Lifestyle (factors such as smoking, alcohol consumption, sports, diet, and regular exercise)

  • Family medical history (to find what type of health conditions do you inherit and may make claims for in the future)

  • Driving record (those with a bad driving record are considered high-risk individuals and may pay higher premiums)

  • Occupation (Those involved in high-risk, risky hobbies such as skydiving and hazardous activities such as operating drilling equipment and heavy machinery may need to pay more)

  • Type of cover (Premiums are higher for policies that offer a more comprehensive level of coverage)

  • The insurance provider: Different insurers may charge different premiums for the same life insurance policy

  • Policy features such as special conditions, the number of additional covers you choose, and optional features may increase the premium.

  • Premium structure - stepped premium, hybrid premium, or level premium.

  • Sum insured: The amount the insurer will pay after you die will also determine the cost of your premium.



10. How To Qualify For Life Insurance?


After applying for life insurance, the insurer will assess the above factors to arrive at a quote. You may need to undergo a medical exam and submit medical records to help them better understand your health condition.


Some insurance policy's come with "assured approval" features and doesn't require medical exams. However, they charge you higher premiums and include an initial waiting period before offering a death benefit.


The healthier and younger you are, the easier it becomes to qualify for life insurance and vice versa. Certain lifestyle choices, such as using tobacco or engaging in risky hobbies such as skydiving, make it harder to qualify or lead to higher rates.



11. What Are The Available Riders With Life Insurance Policies?


Riders offer additional benefits on top of the benefits of a life insurance policy. Policyholders can customize their policies by adding a rider that accommodates their needs. They need to pay an additional premium for each rider to exercise its benefits.


Here are some of the riders available to add to the insurance policy:


  1. An accidental death benefit rider offers extra life insurance coverage in case of accidental death of the insured.

  2. The disability income rider pays you a specific monthly amount when the policyholder can not work for many months due to a critical injury or illness.

  3. The waiver of premium rider helps the policyholder avoid making premium payments when becoming disabled and incapable of working.

  4. The accelerated death benefit rider enables the insured to withdraw the full or some part of the death benefit after a terminal illness is detected.

  5. Guaranteed insurability rider: It allows you to purchase another insurance without a medical review.

  6. Adding long-term care with the insurance policy can pay for assisted living, nursing home, or in-home care when the insured needs assistance with day-to-day tasks.



12. What To Consider When Purchasing Life Insurance?


A life insurance policy is a sensible financial instrument to hedge your bets and protect your loved ones when death occurs while the policy is active.


It is a significant expenditure and commitment, so it is vital to carry out due diligence to ensure the policy serves your financial needs.


  • Research insurer reviews and policy options to ensure the company has a good reputation, solid claim settlement record, and financial strength. 

  • Find out what you wish to insure. Assess your financial responsibilities, living expenses, outstanding debts (personal loancredit card debts, subscription to services, and mortgages), existing investments, and future financial requirements. Consult with your loved ones about their plans for the future. What expenses could be too heavy to carry for them without your financial support to the family?

  • Find out how much cover you require. According to the experts, your life insurance coverage should be a minimum of ten times your yearly income. A life insurance calculator can help you get a rough estimate.

  • Consider your savings, family size, and household income to determine the cover period.

  • Check the waiting period in the policy before you can receive any benefits.

  • Ensure that the premium cost (that increases gradually with age) is affordable even after 10, 20, or 30 years from now

  • Review your other insurance policies to find out whether any of your existing policies cover you for your expected needs

  • Find out the inclusions, exclusions, and limited under the policy.

  • Check with the insurer about what information and medical test reports they need at the time of application. Be honest when you mention details in your application, as wrong information could make it void and prevent you from receiving a refund for your paid premiums.

  • Evaluate the policy to understand any limitations when claiming over one policy with the same insurance provider.

  • Choose who you want your beneficiary to receive the death benefit after your death. Let them know about it.

  • Learn about the claim procedure and grievance redressal mechanism



13. How Is Life Insurance Distributed In Australia?


In Australia, there are three main methods of life insurance distribution to people:


  • Direct: It is the Do-It-Yourself approach wherein the policyholder compares the policies across the websites of different insurers and buys them online.


  • Insurance BrokerYou can take the assistance of a financial advisor/ insurance agent to suggest the best policy for your unique requirements and lifestyle.


  • SuperMany super funds also offer a default life cover to eligible members. Though it is convenient and relatively economical, it can lower your retirement sum.



14. Life Insurance Comparison


Compare life insurance in Australia to find the best insurance that gives you the necessary financial support. 


Here is the comparison based on the features of different life insurance policies:


Death Cover You Receive a Lump Sum Payable In The Case of The Insured’s Death The Suitable Age To Buy The Policy Is 18 to 79
Trauma Cover Lump-Sum It pays you for the detection of a specific critical illness or injury. 18 to 64
TPD benefit Lump-Sum It covers paying for outstanding debts and medical costs if you become permanently disabled. 18 to 64
Income Protection The continuous monthly payout of up to 75% of the regular income It covers living expenditures when you can not work due to injury or illness. The suitable age to buy the policy is 18 to 64
Funeral Insurance Lump-sum Pays a max of $30,000 to cover the funeral cost. 18 to 79
Accident Death/Injury Income protection or Lump-sum It covers medical expenses in case of death or accidental injury. 18 to 64



15. What Is The Best Life Insurance In Australia?


No single insurance works for everyone. It is essential to conduct your research to find out what insurance brand works best for you. NobleOak is the most awarded Direct Life Insurer 2021 in Australia. 


The brand offers affordable premiums and a broader array of added advantages and features.


Some of its unique features include:


1. Low premiums

2. Comprehensive cover options:


  • Life insurance 

  • Income protection

  • Total Permanent Disability Insurance

  • Trauma Insurance  


3. Fully underwritten insurance


4. Awarded Canstar Outstanding Value Award for Direct Life Insurance in 6 consecutive years, 2016 - 2021.


Other good insurance brands are Westpac life insurance, TAL, AHM, Guardian, HCF life insurance, and Medibank insurance. 


NRMA life insurance has also been a famous insurance brand in Australia. Still, they have stopped offering new life insurance policies from April 01, 2021.



16. Should You Go For The Most Affordable Life Insurance?


You might get drawn to buying the cheapest life insurance in Australia to keep your premium costs down. Though the premium price is one of the essential considerations, you should pay equal attention to the coverage level required to meet your family's needs. 


The insurance policy should give you the benefits and the best value for money.


Real-life insurance is an award-winning Insurance recognized for providing the best value and service. The company offers simple and fixed-term life insurance that expires after 20 years or upon attaining the age of 85 (whichever comes first).


Policyholders can choose a lump sum payment from $100,000 to $1 million, depending on their needs. The insurance provider pays the cash payout on the expiry of the cover or when identified with a Terminal Illness (with less than one year to live).


Other policy features:


  • Free interim Accidental Death cover for a max of 30 days 

  • Advance and the full payment of Benefit Amount when detected with a Terminal Illness (with less than 12 months of surviving period)

  • $10,000 advance funeral benefit payable to meet the immediate funeral costs 

  • Optional covers include Children's Insurance, Total and Permanent Disability Cover, and Serious Illness Insurance.



17. Conclusion


Financial security is vital for everyone at every stage in life. Life insurance offers much-needed financial support to you and your family to preserve the way of living under any misfortunate event.


Now that you understand life insurance's meaning and importance, you can choose between permanent or temporary cover to meet your short- or long-term needs.


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