How do life insurance payouts work?

Taking out life insurance is a big decision.

After all, you're doing it to guarantee the lifestyle you've built for yourself and your loved ones.

But when the time comes to claim, how do you or your policy's beneficiary collect life insurance?

Is it as simple as contacting the insurer? And when does life insurance pay out?

Not all life insurance policies are created equal, so here's what you need to know about collecting a pay out.

Then, you can find the right policy by speaking to the experts at Compare Club.

How does life insurance work?

Life insurance is a policy that financially protects your way of life should something unexpected happen to you.

That means if you were to pass away, become terminally ill or be unable to work due to illness or injury, life insurance can provide you and/or your loved ones with financial security.

How much does life insurance cost?

There's no umbrella answer for this question. It will depend on the type of cover you choose - term life insurance, total and permanent disability cover, income protection, trauma cover -- the level of cover you want, the insurer you choose, and a range of other factors, such as your age, lifestyle and pre-existing conditions.

That's why it's important to compare life insurance rather than choose the first provider you find.

It's also important to take time to understand the ins and outs of the policy, such as knowing what's excluded from your cover.

How do life insurance claims work?

Life insurance claims can start with an event that allows the beneficiary to make a claim -- for example, when someone with term life cover passes away, or when someone with total and permanent disability (TPD) cover can never return to work due to a medical condition.

Term life is the simplest scenario.

It can be claimed when you die, or if you are diagnosed with a terminal illness and doctors believe you are likely to pass away within 24 months of diagnosis.

For a TPD claim to be accepted, you must meet the insurer's definition of being disabled and no longer able to work for the remainder of your life.

It will also depend on the TPD definition within your policy. There's two different types of TPD you can have.

• Own Occupation pays out if you make a claim because you can't work permanently in your own occupation at the time of your claim.

• Any Occupation pays out if you make a claim because you can't work permanently (through TPD) in any occupation suitable for your experience, education or training.

What does any occupation and own occupation mean?

Meet Kat. She's a mechanic. She badly injures her arm in an accident and is unable to work as a mechanic again.

Own Occupation: Kat can claim on an Own Occupation TPD policy. She was working as a mechanic when she was injured and cannot return to this job.

Any Occupation: Kat can only on an Any Occupation TPD policy if she cannot work in any occupation she has experience, education or training in. Kat used to work in a call centre before becoming a mechanic. Her Any Occupation claim may be denied if she could still work in a call centre.

Making a trauma cover claim is relatively straightforward.

Once you've been diagnosed with a condition, such as cancer or Alzheimer's, or suffered a major illness such as a heart attack, you can submit a claim.

Most insurers will wait for a short period of time -- usually 14 days -- to make sure you survive before they'll accept the claim.

You can see what conditions are covered under trauma insurance in our guide.

Finally, you can make an income protection insurance claim if you're seriously ill or injured and are temporarily unable to work.

You'll generally receive a monthly benefit of up to 70% of your income at the time of the claim.

Term life, TPD and trauma cover all pay out a lump sum, while income protection provides a monthly benefit.

How do life insurance payouts work?

So, just how do you collect life insurance?

This is dependent on your policy and whether it's funded in or out of super.

How life insurance payouts work

For life insurance through superannuation, it's determined by the trustee of your super fund.

They'll decide if you meet the conditions of release from your super.

If you don't, then the money will be paid into your super but you won't be able to access it until you can access all your super (i.e. when you reach a certain age or retire).

In part-funded life cover -- where some of your life cover is paid via your super -- the insurer will always try to pay through your super first.

If it's clear the trustees won't release your funds, then the insurer will pay it directly into your pocket.

For life insurance outside of super, the policy owner receives the payout directly, as their name is on the policy and they are responsible for paying the premiums.

Is life insurance paid out in lump sums?

Yes, you or your beneficiaries will receive a lump-sum payment upon your life insurance provider paying out on your policy.

The only exception is income protection, which is paid out in monthly benefits.

What percentage of life insurance policies are paid out?

The latest figures from Moneysmart show the industry average for life insurance claims on 'direct policies' -- life cover purchased directly through an insurer -- is 90%.

However, that figure fluctuates according to the insurer, with some being as low as 83.1%*.

That number is higher for retail life insurance (also known as advised life insurance), which are the type of policies that Compare Club compares.

Moneysmart puts the average claims acceptance figure at 96.4%, and some insurers on our panel pay out in 98.3% of claims.

Similarly, you may be wondering how long do life insurance policies take to pay out? It depends, but the industry average is around 1.5 to 3 months for term life cover.

How much is a typical life insurance payout?

There is no set -- or even average -- figure for life insurance payouts.

It will depend entirely on the amount of cover you've taken out, your insurer, and the circumstances in which you are making a claim.

What reasons would life insurance not pay out?

It's essential that you're honest with your insurer when you apply for cover.

If you don't disclose anything they ask for, or you make a false statement, then the insurer will probably reject your claim.

Each insurer will also have different definitions and exclusions on what they will and won't pay out on.

You also need to make sure your claim meets the insurer's definition, so ask lots of questions and always read the PDS.

What types of death are not covered by life insurance?

There are a few potential scenarios of life insurance not paying out.

Life insurance will not pay out on suicide claims within the first 13 months of the policy.

Similarly, you won't be covered if you die after travelling to a high-risk country or warzone.

Do I have to die to collect life insurance?

Not necessarily.

If you're diagnosed with a terminal illness and have less than two years left to live, many insurers will pay out on term cover.

You'll need to be alive to claim TPD, income protection or trauma cover.

Life insurance is one way to guarantee the life you've worked so hard to build for you and your loved ones so make sure you understand all the ins and outs of your policy, including when life insurance pays out.

*MoneySmart, Life insurance claims comparison tool, September 2021.

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.