When is life insurance paid out?
It’s important to understand the key points in your cover when you take out a life insurance policy – such as when it pays out. Here’s what you need to know.
by Simon Jones
Last update 15 Apr 2021
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.
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.
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.
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.
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.COMPARE & SAVE
So, just how do you collect life insurance?
This is dependent on your policy and whether it's funded in or out of super.
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.
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.
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.COMPARE & SAVE
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.
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.
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.
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.COMPARE & SAVE
*MoneySmart, Life insurance claims comparison tool, September 2021.
This guide is of an informative nature only and not representative of Compare Club products. It should not be taken as medical or financial advice. Check with a financial professional before making any decisions.