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The basics of life insurance

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Generally, insurance is seen as essential for tangible assets like your home and motor vehicle. Another type of insurance – life insurance – can be purchased to help support the lifestyle you have created for you and your family if you have an accident or get sick.

What is life insurance?

Life insurance provides a lump sum or ongoing payment to an individual or their family in the event of death, illness, injury or permanent disability. This payment can help people to maintain their existing lifestyle by helping to cover current and future living expenses, replace income or pay off big expenses, such as a mortgage.

If you buy insurance, you usually need to pay a monthly fee – called a premium – to your insurance provider, which contributes to the life insurance payment if you need to make a claim. It can also be paid through your superannuation, if you chose to opt in for this cover.

What types of life insurance are available?

Life insurance policies vary depending on the needs of the individual. There are four types of life insurance policies available in Australia:

  1. Life insurance: Pays your family or estate a lump sum amount when you die.
  2. Income protection: A type of insurance designed to replace your income if you are unable to work due to illness or injury.
  3. Recovery (trauma) insurance: Pays you an agreed amount if you are diagnosed with a specified critical illness, such as cancer or heart disease.
  4. Total permanent disability (TPD) insurance: Gives you a tax-free lump sum payment if you are permanently unable to work due to accident or illness.

Where do you get life insurance?

There are four ways to take out life insurance, which come down to personal preference and circumstances:

  • Via a financial adviser
  • Through your superannuation fund
  • Through your employer, or
  • Direct from an insurer.

What to look for before considering life insurance

Before you consider life insurance, make sure you check whether you already have life insurance through your superannuation. When it comes to insurance in superannuation, it’s vital to understand what the insurance covers, as superannuation insurance can be limited. You can get a copy of a document called a Product Disclosure Statement (PDS) from your fund, which will tell you what circumstances payments are made and what circumstances they are not.

If you are buying life insurance directly or through a financial adviser, make sure you also check the product disclosure statement for:

  • What is and is not covered under the policy;
  • What information an insurer will need before offering you cover (e.g. they may ask about your age, your health and your family history);
  • How much you have to pay for the insurance and how that may change in the future;
  • How long you have to wait before you make a claim; and
  • How to make a claim.

Jo Hetherington is the Head of Financial Health at TAL. TAL is a partner of the First Nations Foundation, which publishes this website. 

Editor’s note: This article is not a substitute for personalised financial advice. Insurance may be right for one person, but not right for another. It’s important to be careful about calls or door knocks from people offering to sell you insurance. You can always seek a second opinion or the advice or an adviser if you’re not sure about whether to buy something, including insurance. 

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