What is Life Insurance and Should You Get It?
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What is Life Insurance and Should You Get It?

Katie Douglass

Katie Douglass

26/03/2021 • 8 minute read

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What is life insurance and do I need it?

Life insurance can be a sensitive topic, and we understand it can be uncomfortable to think about the worst-case scenarios. However, it’s super important to ensure you and your loved ones will be financially secure in the event of a death, terminal illness, or serious disability. So, what exactly is life insurance? Life insurance provides a lump-sum payment to the nominated beneficiary or beneficiaries (usually a spouse or dependent/s) to help cover any existing or future expenses. If you haven’t named a beneficiary, your estate or super trustee can determine where your money goes.

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What things can life insurance help with?

  • Mortgage repayments
  • Funeral, medical, and/or ongoing living expenses
  • Palliative care
  • Replacement of income

Life insurance isn’t always necessary for everyone. If you don’t have a spouse or dependent/s that rely on you financially, you might not need life cover. Instead, you could consider buying other types of life insurance, including trauma insurance or income protection insurance. Ultimately, before signing up for a life insurance policy you should consider all your options and whether seeking financial advice may be necessary.

At Oiyo, we’re not financial advisors. We’ve prepped this easy-to-understand guide to simply help explain some of the types of cover, costs, and considerations worth noting when searching for the right life insurance policy for you. So, let’s dive in!

What is covered by life insurance?

There are many things your life insurance policy can cover but it depends on the type of cover you get. There are four different types of life insurance coverage that can either be purchased individually or bundled into one policy. If you combine multiple life insurance products it will give you more protection, but it also can cost you more. Here’s a quick breakdown of what each covers:

Life cover

Also known as ‘term life insurance’ or ‘death cover’, life cover pays a lump sum to a nominated beneficiary or beneficiaries in the event of your death or if you are diagnosed with a terminal illness. This lump sum payment helps financially support your loved ones with everyday living expenses, debts, mortgage repayments, and/or future costs.

Total and permanent disability (TPD) insurance

Total and permanent disability (TPD) insurance provides a lump sum payment if you become totally and permanently disabled and aren’t likely to work again. This payment can help with the costs of rehabilitation, living expenses, income replacement, and debt repayments.

Trauma insurance

Also known as ‘critical illness cover’, trauma insurance pays a lump sum to help cover medical and rehabilitation expenses if you become seriously ill or injured. Usually, trauma insurance mainly covers illnesses such as heart attract, stroke, or cancer. However, it’s best to check with your insurance provider what illnesses are covered under their policy and the severity of the illness.

Income protection insurance

Income protection insurance provides regular monthly instalments to help replace lost income if you can’t work due to a serious illness or injury.

How much does life insurance cost?

While we can’t give you an exact estimate of how much your life insurance policy will cost (it depends on the individual), we can give you a helpful insight into what factors might determine how much you pay.

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What contributes to the cost of life insurance?

  • The amount of cover or benefit
  • Your health
  • Premium structure
  • Replacement of income

Generally, the more likely you are to make a claim, the higher your premiums. This is why older Aussies are likely to have higher premiums on their policy than younger ones — because of the risk of illness, injury, or death increases as you age. Alongside your age, your smoking habits, general health, and family medical history can also determine the cost of your premiums. For instance, if someone is a regular smoker, they’re likely to have a higher premium than someone who isn’t.

The type of cover you choose can also affect the cost of your life insurance policy. If you include more cover types, your premiums will be higher. Alongside the type of cover, the cost of life insurance depends on the premium structure you choose. There are primarily two types of premiums — stepped premiums and level premiums. There’s also hybrid premiums which have elements of both stepped and level premiums.

Stepped premiums

Stepped premiums are updated once a year and generally increase as you age. The cost of your stepped premiums gets higher every year because of the greater chance of claiming as you get older. The cost of premiums is typically assessed at each policy renewal. As a result, if you’re looking for short-term life insurance cover, then this type of premium may be more suitable.

Level premiums

Level premiums are higher and the cost depends on your age at the time you purchase the policy. While these rates are not locked, they can be more affordable if you’re looking at getting life insurance long-term.

What is the best life insurance?

Everyone’s situation is different! There’s no ‘one size fits all’ when it comes to the best life insurance cover for you. It depends on a lot of factors, however, there are a few things to take into account when comparing the policies on offer.

Moneysmart has a life insurance calculator that you can use to help you work out whether you need life cover, how much you might need, and what expenses your life cover will pay for when you die. Just remember, this calculator only looks at life cover, not other types of life insurance.

How to compare life insurance policies

Step 1: How much cover do you need?

First off, you should determine how much money your loved ones will need in the event of your death or a serious illness. So, some questions you need to ask yourself include (but are not limited to):

  • Do you have any outstanding debts and/or mortgage repayments and how much? In the event of your death, how much would be left?
  • How much ingoing living expenses including; rent, child care, education fees, and food, would need to be covered?
  • How long do you want to be covered for? Do you want short-term or long-term life insurance cover?
  • Do you have any backup options such as savings, super, investments, paid leave balance, and/or assets that can be used to financially help your loved ones?

Step 2: What type of cover do you want?

After you determine how much cover you’ll need and what type of cover you want, it’s a good idea to compare the life insurance policies that are available. There are a number of factors you’ll need to keep in mind when shopping around, such as:

  • What are the policy features and benefits?
  • What exclusions are included in the policy?
  • How long do you have to wait before you can make a claim?
  • What will the premiums cost? How much will they increase in the future?

Step 3: What about your super?

Before you compare the life insurance options on offer, make sure to check you don’t already have life insurance through your super. Most super funds offer life cover when you sign up and your superannuation contributions go towards your premiums. Don’t fret if this is the case. You can generally increase your life cover through your super if you need to.

How to buy life insurance

If you’ve decided to buy life insurance, you’ll need to consider how you want to apply for it. There are three main ways to apply for life insurance cover and there’s no right answer for this one. Here are some of the more common methods you may need to consider:

1. Financial adviser

You can apply for life insurance cover through a financial adviser or insurance broker. Comparing life insurance policies can be a daunting task so getting expert advice from a financial adviser can help you figure out what type of cover you need and how much. One of the disadvantages is that it can cost more as an adviser’s fee can be included in your premiums or can be an additional charge. Refer to MoneySmart’s guide, for more help on choosing an adviser.

2. Superannuation

As we mentioned earlier, you might already have life insurance included in your superannuation fund. This is usually the cheaper way but make sure to check if you have enough cover and if there are any limitations to the policy.

3. Insurer

One of the options in applying for life insurance is going directly to an insurer. Before choosing an insurer, we suggest determining what kind of cover you need before comparing policies and figuring out which one is more suitable for you. The downside to doing it this way is that it can be a lengthy and complex process.

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An important reminder!

Before you buy a life insurance policy, your insurer or financial service provider must by law give you a product disclosure statement (PDS). A PDS is a document that includes the product’s features, fees, commissions, benefits, risks, and the complaints handling procedure. This document should include everything from what’s covered and excluded under the policy, cost of premiums, the information you’re required to give and the claims and complaints procedure.

We hope you enjoyed our guide on what life insurance is and found what you were looking for. If you want to learn more about life insurance, check out some of our other articles on Oiyo!


*The information about life insurance provided on this page is general knowledge only. It does not consider your financial situation or needs and is not intended as advice. You should always carefully consider the relevant Product Disclosure Statement before making a decision concerning an insurance product. Please see our Terms of Use on this site for more details.

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Katie Douglass

Written by Katie Douglass

Katie Douglass is the Communications Manager at Oiyo and a writer. In recent years, Katie's work has appeared in publications such as Marie Claire, InStyle, and THE ICONIC. She has a Bachelor of Creative Industries in Fashion Communication & Journalism from the Queensland University of Technology. At Oiyo, Katie is responsible for overseeing editorial strategy.

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