A step by step guide to buying life insurance

We've created this guide for you to help you understand life insurance.

It's a breakdown as free from jargon and simple as can be.

Whether you're at the start of your life insurance journey or this is just your next step, the key to feeling in control is understanding exactly what you're paying for.

In just a few short paragraphs, you'll get an essential understanding of how these products cover you, how claims work and the steps involved in buying insurance.

The essentials

Terms you should know

• Life Insurance: At the most basic level, it refers to the range of insurance products that look after you if something unexpected happens to your body or mind.

• Insured: The specific person who is covered by the policy.

• Policy: The legal contract between the insured and the insurer.

• Policy Owner: This is the person or entity that owns and therefore has control over the insurance policy. The policy owner is responsible for ensuring that premiums are paid.

Money

• Premium: The amount you pay for your insurance. You may pay this monthly or yearly

• Claim: The process of requesting payment of the insurance policy.

• Benefit: The amount to be paid if the claim is accepted by the insurer. Depending on the insurance, this may be paid in installments or a lump sum.

• Beneficiary: The person or persons who will receive the benefit once the claim has been accepted by the insurer.

• Renewal: Every year, leading up to the anniversary of you first taking out your policy you'll receive a renewal notice that lets you know the cost of your premium for the following year.

Need to know

• Underwriting: This process assesses the level of risk that a person looking to be insured presents to an insurer in terms of the person's overall health and any pre-existing medical conditions. This allows the insurer to decide whether or not to insure an individual and whether any conditions will be applied to the policy.

• Loading: This is an increase in the premium price if you are associated as being of a higher risk during the underwriting process. This may be due to prior health complications or smoking status..

• PDS: This stands for Product Disclosure Statement. This document will contain everything you need to know about the insurance product you are buying. It explains the conditions you are covered for and how the benefit will be paid

Our tip: We won't be the first to tell you, but you should always make sure you read and understand the PDS before you buy insurance.

Much more than death cover

The chances are, when you think about life insurance, you're thinking of Term Life Insurance.

Also known as Death Cover, this product pays a lump sum benefit to the specified beneficiaries if the insured person passes away.

However, there are also a range of "living insurance" products that pay a benefit to the insured while they are still alive.

They typically provide financial assistance at a time when you've suffered a life-altering event and are not able to work.

Trauma insurance: Also known as Critical Illness Insurance, this covers you if you experience a serious illness or injury, regardless of your ability to work.

Some commonly covered conditions include certain cancers, heart attacks, and strokes.

Trauma Insurance pays a lump sum benefit upon diagnosis, giving you the resources you need to assist with recovery and helping you make up for lost income.

Income protection: Cover if you are temporarily unable to work due to illness or injury.

Unlike all other types of life insurance, Income Protection is paid as a monthly benefit, rather than a lump sum. This benefit can replace up to 70% of your income.

Income protection insurance is usually tax-deductible and designed to cover living costs.

Certain hazardous workplaces will actually require their workers to have Income Protection due to the increased likelihood of injury.

Total & Permanent Disability (TPD): As the name implies, the purpose of this insurance is to assist you if you become totally and permanently disabled.

In most cases, you must be unable to work in your own or any occupation to qualify for the benefit based on the type of cover you have.

In the event that you are totally or permanently disabled and unable to work, you will receive a lump sum benefit from the insurer.

Key person insurance/Business expenses: This type of life insurance is very different from all of the above as it's actually taken out by a business.

The purpose is to insure the business against the loss of an indispensable employee to either death or illness or injury that prevents them from working.

In this case, the benefit is paid to the business in either monthly installments or a single lump sum depending on the insurer.

The Life Cycle of a Life Insurance Policy

Buying life insurance

This depends upon your needs, the amount of cover required and the type of cover required (term life or living insurance cover).

Different insurers have different types of policies and hence it is best to shop around to buy a policy.

Securing your cover

Once you have an active life insurance policy, you will have to regularly pay your premiums or risk losing your cover.

As such, it's very important that you make sure your payment details are up to date, especially if you are paying by direct debit.

Staying valid

As long as you pay your premiums on time, your cover will be valid not just in Australia, but wherever you are in the world.

Depending on the type of cover, it will remain valid until you reach the policy expiry age.

This age varies across insurers and products.

Making changes

If at any point you wish to make a change to your cover, all you need to do is get in touch with the insurer.

You may, for example, wish to increase your benefit amount because you've taken on a new mortgage and want to ensure it can be paid in full if you were to pass away.

Making a claim

When it is time to make a claim, the insurer will need to be provided with evidence proving that the claim meets the conditions of the insurance contract.

Claim procedures are unique to the insurer, but the first step is always to contact the insurer and understand what you'll need to send to them.

Our team can provide assistance when it's time to claim.

Why might a claim be rejected?

Claims will be accepted by the insurer if they meet the terms that are established in the contract.

There are two main reasons a claim will be rejected.

1. If the individual has broken the contract terms. For example: if they lied to the insurer about their health when first taking out insurance.

2. If the claim does not meet the terms of the contract. Life insurance covers specific conditions, and not all causes of death will result in a successful claim. For example, death as a result of illegal activity may mean the claim is rejected.

Paying the benefit

Once the claim has been accepted, the benefit will be paid to you or your nominated beneficiaries.

Depending on the type of claim, this may signal the end of the insurance contract.

You should be sure to keep your beneficiaries up to date to make sure the benefit is paid according to your wishes.

How to buy life insurance

Evaluate your needs

Before you start shopping for life insurance, you should take the time to reflect on your finances.

What would happen if you passed away tomorrow or you were suddenly unable to work? How much money would your family need to be able to get by without your financial support?

These are the kind of questions that can help you understand how much you'd like to insure yourself for.

Think about your debts and assets.

If you sold your assets and combined this with your savings would you be able to clear your mortgage, loans and other debt?

These questions are a useful starting point.

We've also developed a calculator that you can use to estimate the amount of cover you might need.

Compare your options

There are a number of life insurers out there, and each of them offers something slightly different to their customers.

While at the core you are still purchasing the same insurance, each insurer could offer perks or unique benefits to try to differentiate themselves from the competition.

Comparing insurers on exactly how they will cover you is difficult, and for simplicity many consumers will simply compare on price and choose the cheapest option.

However, if your health status will incur any additional loading to the standard premium this becomes a much trickier task.

The Compare Club team offers an in-depth comparison of Australia's leading life insurers on the benefits they offer and the price.

This service is offered free of obligation and cost, all you need to do is get started below.

Time for application

Once you've selected an insurer, a life insurance specialist will go through some underwriting questions for a detailed assessment of your health.

This is the time when the insurer will assess your level of risk. For more information about underwriting in life insurance, you can click here

During the application process they'll also decide if they need any additional information from you before accepting your application for life insurance.

Finalise your policy

The application process concludes when the insurer decides to accept or reject your application.

They will present you with the terms of the life insurance policy, almost like an employer offering you a job, and then it's up to you to accept or reject them.

If you accept them, this stage is when you will provide your payment details and specify who your beneficiaries will be.

This can be trickier than it sounds, especially if you have children under the age of 18, so we've put together a list of the "Questions to Ask Before Choosing a Life Insurance Beneficiary" to help you.

As soon as you accept the policy, your cover will be active and you'll receive a copy of the policy and a welcome pack from the insurer within 10 working days.

The most important thing now is to make sure your policy & payment details are correct.

If you miss your first payment your cover can be made void.

Why you should regularly review your existing insurance

1. Price sensitive

Like any other market, life insurance has a lot of players who are competing for your business. While prices are unlikely to change dramatically, insurers do update their products and this can result in cheaper premiums.

2. Reward programs

In the last few years, some insurers have started offering reward programs that reward their clients for keeping fit with reduced premiums and vouchers. Whether you're a fitness fiend or just getting started, these insurers could help you save.

3. Life changes

Just finished paying off your mortgage? Have you recently had children? Your financial needs change over time and your insurance should change with them. If you've drastically reduced your level of debt you may want to review the amount of life insurance you have.

4. A better fit

Many people only know about death cover when they first purchase life insurance.

You may find that this totally suits your needs, or you might find that exploring other options like Trauma, Total & Permanent Disability or Income Protection cover could offer greater peace of mind.

If you're looking for ways to save on your existing insurance, you can read this guide that has 11 more tips to help you reduce the cost of your life insurance.

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

Meet our life insurance expert, Matthew Lang

Matthew's top life insurance tips

• 1

  Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.

• 2

  It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.

• 3

  Life insurers like those on our panel pay an average of 97% of claims in full.

• 4

  There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.