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What is life insurance?

What is life insurance?

Sometimes called ‘life protection’, ‘life cover’, ‘death cover’, or ‘term life insurance’, life insurance is generally an agreement between you and the insurer that in the event of your death, they’ll pay your family a lump-sum of your selected cover amount (depending on underwriting criteria), with some policies also covering you if you were diagnosed with a terminal illness.

Life insurance is designed to help financially protect your loved ones when you no longer can. While the payout is intended to provide for your family in the same way your income used to, ultimately, it can be used however your family sees fit. Generally, the payout would be intended to go to your immediate family like your partner or kids, but you can nominate anyone as a beneficiary to receive your payout. If you don’t nominate a beneficiary, the payout will go to your estate. While a claim is assessed, many policies also offer an advanced payment of a portion of the cover amount which can go towards funeral expenses.

It’s important to remember that while you’re covered for death (including accidental death), there are some exclusions. Most policies won’t cover you if you die or get diagnosed with a terminal illness if it’s due to a deliberate self-inflicted act within the first 13 months of your policy. This waiting period varies per insurer, so ensure you check what this period is before buying a policy.

Depending on your own circumstances, your insurer may also impose other exclusions on your policy. The best way to know exactly what your policy covers you for and what you’re not covered for, is to check your insurance contract (commonly known as a Policy Schedule or Certificate of Insurance) and Product Disclosure Statement. You should always read the Product Disclosure Statement of the policy you’re interested in first before purchase, so you can decide if the product is right for you.

For the range of life insurance policies you can compare and apply for directly through Choosi, you can choose cover from $100,000 up to $1.5 million, depending on your age at the time you apply. For some policies, the amount you can apply for will also be determined by your income at the time. You can apply for life insurance through Choosi as long as you’re an Australian resident aged 18 to 64 (or 65 for some policies).

Why you may want to consider life insurance

You may want to ask the following questions when considering life insurance:

  • Do you have a partner and/or kids who depend on you financially and would struggle without your income?
  • Is your partner a stay-at-home parent or only works part-time?
  • Are you a single parent and the sole provider for your family?
  • Do you have a mortgage on your home, school or childcare fees to pay, personal loans like a car loan, or significant credit card debt and/or personal debt?

It’s so easy to think that you’re invincible when you’re relatively young with no health issues, but as much as no one wants to admit it, we all know that tomorrow isn’t guaranteed. Anything can happen to us at any given time, and we just don’t know when our time is up. Think of all the years you’ve worked hard to provide a lifestyle that your family now gets to enjoy.

Research shows that despite high levels of financial anxiety and worries, many Australians are still turning their back on insurance that could protect them from key financial risks. The 2019 Choosi Dollar Report found that 58.6% of Australians surveyed do not have any life insurance.

Now ask yourself the hard question: if you died tomorrow and your income was lost:

  • Would your family be able to continue to live the same way?
  • Would your partner be able provide for your family in the same way if you’re no longer around?
  • Would all your financial obligations continue to be met without your income?

If you answered ‘no’ to any of the above, then it may be worth considering having a plan B, such as a life insurance policy.

What does a life insurance payout involve?

A life insurance payout can help give your family the financial protection it needs in case your life took a turn for the worst. With a life insurance policy that you can tailor to your needs with optional covers, it means your family may be able to pay off (or continue to pay) the mortgage, or other debts could be cleared, and your family can continue their lifestyle without struggling financially.

Having life insurance can help give you that peace of mind knowing your loved ones won’t have the additional worry about money when they should be focusing on grieving their loss at an already difficult time.

The different types of life insurance available

There are a number of different types of life insurance and each type is designed to protect you in different ways:

Life insurance generally covers you for death or diagnosis of a terminal illness. If you get diagnosed with a terminal illness, it will get paid to you, or if you die while your policy is active, it will pay out a lump-sum of your choice to your loved ones or anyone that you nominate to receive it. Without a valid nomination, this payout usually goes to your estate.

Critical or serious illness/trauma insurance generally covers you if you were to suffer from a specified list of covered serious illnesses like cancer, a severe heart attack, or a stroke. Depending on your insurer, you can choose to take out this policy as a standalone one or add it as an optional benefit to your life insurance policy.

Total and permanent disability/permanently unable to work insurance generally covers you if you were to suffer a total and permanent disability from being sick or injured, and as a result, you can’t work anymore. Different insurers have different definitions of what they regard as a total and permanent disability, so it’s important that you understand what each one is (check the definition in the relevant Product Disclosure Statement). Depending on your insurer, you can choose to take out this policy as a standalone one or add it as an optional benefit to your life insurance policy.

Children’s insurance generally covers your kids for death, diagnosis of a terminal illness, or a specified list of covered illnesses. These illnesses differ per insurer, so check what’s covered in the Product Disclosure Statement. This insurance is generally available as an optional benefit that you can add to your life insurance policy.

It’s important to remember that as with any insurance product, there will be waiting periods, terms and conditions, and exclusions that apply. Always read the relevant Product Disclosure Statement so you know exactly what is and isn’t covered and if there are any waiting periods that apply (and what they are), or if the policy has an expiration date.

How much life insurance costs

What you pay for your policy is generally based on a number of personal factors, which are used by the insurer to assess your level of risk to insure. Generally, the ‘riskier’ you are to insure, the higher your premium will be. These factors are typically:

  • Your chosen cover amount: the more cover you want, the higher your premium will be.
  • Your age when you apply: the older you are, the higher your premium will be.
  • Your gender: generally, males attract a higher premium compared to females, with other factors being equal.
  • If you smoke: a smoker tends to attract a higher premium compared to a non-smoker.
  • Your health and family health history: similar to your smoking status, if you have a number of health conditions or you’re genetically prone to having health conditions due to family history, your insurer may choose to add a premium loading for those conditions (making your premium higher), not cover you if you die due to having those conditions (exclusion), or in some circumstances, deny your application for cover altogether.
  • Your job: if your job is within the ‘risky’ category where you need to do things like work with explosives, or underground, then it’s likely to push your premium up.
  • Your lifestyle: if you engage in a lot of risky activities, similar to your health, it could mean your insurer can apply a loading to your premium making it more expensive, exclude cover if you die from such high risk activities, or in some circumstances, deny your application for cover altogether.

When you apply for your policy, your insurer will consider all of the above factors to work out how much your premium will be. Because everyone’s circumstances are different, your premium may never be the same as another person’s premium despite the fact they may be the same age or gender as you or if they have the same cover amount.

Other factors like your health, lifestyle, job, or family health history also play a part in how much your policy will cost.

Your life insurance policy could cost more over time

When it comes to your premium, your insurer may offer a stepped or level premium. A stepped premium (the most common type of premium) is one that increases each year as you age.

The main reason it increases is due to the added risk to insure you as you get older. A level premium is one that doesn’t increase each year but is a flat rate premium for the life of your policy, unless you change your cover or the rates for the product are amended. Check with your insurer what type of premiums they offer and weigh up the pros and cons of each type before deciding which one suits you.

A stepped premium is also likely to increase each year as many policies take into account the increase in the cost of living. Put simply, due to inflation, a $500,000 cover amount today will be worth less than $500,000 cover in 5 or 10 years. Because of this, many policies automatically increase your cover amount by a certain percentage (usually between 3-5%) each year when your policy renews, so that if you ever need to make a claim, your cover amount is in line with the current cost of living. This increase in cover amount will in turn also increase your premium. You may be able to choose to decline this increase in cover though, but you’ll need to discuss this with your insurer.

How your age affects your ability to get life insurance

Your age may be one of the biggest factors that your insurer will consider in whether you’re eligible for a life insurance policy, and if you’re approved, how much you’ll pay for it. Each insurer will have their own age eligibility criteria for a life insurance policy, and if you fall outside of this age range, unfortunately, you won’t be eligible for that particular cover.

Generally, many policies need you to be between 18 and 65 years old at the time of application. The older you are when you apply, the more expensive your premium at the start of the policy may be. The reason for this is as you age and experience health issues, the likelihood increases that your insurer may apply a loading or special exclusion to your policy, or you may even find that some insurers will decline to offer you cover.

Another thing to note is that your age can dictate how much life insurance cover you can apply for. For example, while the maximum cover amount offered by an insurer may be $1 million, if you’re say, 45 years old when you apply, the maximum cover amount you may be eligible to apply for could be only $750,000.

Generally, the older you are, the lower the maximum cover amount you can choose will be. Why? It’s because the older you are, the higher your risk is. Insurers typically therefore reduce the risk of a large claim by offering you a policy with a lower insured amount.

An alternative to a life insurance policy that could be worth considering is a funeral insurance policy, as it can help reduce the financial stress for your family by paying out a lump-sum that can go towards your funeral cost and other end-of-life expenses.

For funeral policies available through Choosi, you can apply for cover from $3,000 up to $15,000 if you’re an Australian resident aged 18–79. Learn more about funeral insurance.

How much life insurance do you need?

While you’re limited to the minimum and maximum amount you can apply for based on your age (and for some policies, income) at the time you apply, when deciding on how much cover to get, it’s a good idea to think about:

  • Existing debts – personal loans, credit cards, mortgages.
  • Living expenses – rent, bills, school fees, insurance, utilities, food, fuel.
  • Your partner’s ability to earn an income.
  • How many kids you have and their ages.
  • Your super balance.
  • Existing savings and/or investment income.
  • Your paid annual leave balance.

For the range of life insurance policies you can compare and apply for directly through Choosi, you can choose cover from $100,000 up to $1.5 million, depending on your age at the time you apply. For some policies, the amount you can apply for will also be determined by your income at the time. Note that any optional life insurance benefits you add to your main policy (like serious illness or children’s insurance) will typically have their own cover amount limit.

Need help in working out how much cover you need? Check out our article on calculating life insurance or use the Moneysmart life insurance calculator.

This information is general only; doesn’t take into account your personal objectives, financial situation or needs; and shouldn’t be relied upon as advice. You should consider the relevant Product Disclosure Statement (PDS) for more information and to ensure the product suits your needs. If you have legal, tax, or financial questions, you should consult an appropriate professional.

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