What is term life insurance and how much does it cost?

Life insurance comes in all shapes and sizes, and deciding which policy is right for you can be challenging.

To make things even more confusing, the same policy type may go by a number of different names depending on the insurer.

This guide will walk you through one of the most popular types of life cover: term life insurance.

What is term life insurance?

Term life insurance goes by a number of other names, and you've probably heard them before:

• Life cover

• Death cover

• Life insurance

That's right---when we talk about term life insurance, we're talking about the classic type of life insurance.

With term life insurance, a lump sum is paid out to your beneficiary if you die or are diagnosed with a terminal illness.

The payout amount is determined by the benefit level you choose when purchasing the policy.

You are the one who nominates a beneficiary or beneficiaries, however there could be an exception to this.

If you have life insurance through your super, you can make a binding nomination, but this usually expires after three years.

Check with your fund for its rules about beneficiaries.

How can term life insurance help my family?

The purpose of term life insurance is to protect your family's finances.

A $500,000 death benefit may seem like a huge sum, but it isn't like winning the lottery.

This is money that is intended to replace your income if something happens to you.

The funds can go towards crucial expenses for your family, such as:

• Mortgage payments

• Rent payments

• School fees

• Medical expenses

• Groceries, fuel, and other living expenses

• Funeral costs

• Bills

There are no rules about how a life insurance payout has to be used, but most families get great peace of mind from knowing they don't have to worry about finances during a tough time.

Who should have term life insurance?

It's not just the highest income earner who should have term life insurance.

It's anyone in the household whose contribution would be missed.

This includes a spouse who doesn't earn an income but who might look after the kids or manage the household.

These services would have to be paid for if that person were no longer able to perform them, and can be insured.

When should I buy term life insurance?

Is there anyone in your life who depends on your income?

If the answer is yes, then you should consider buying term life insurance now.

Life insurance isn't something you can buy when you need it; if you wait until then, it'll be too late.

Here are a few life events that prompt people to buy life insurance:

• Getting married

• Starting a family

• Buying a house

• Changing jobs

• Starting a business

• Supporting elderly parents

• Caring for siblings

How much term life insurance do I need?

Before pinning down a benefit amount, you should take stock of your financial situation.

The more debt and expenses you have, the more cover you'll need.

When adding up your debts and assets, you should consider your current situation and future situation.

Debts aren’t just money you owe from a loan, but ongoing expenses.

For assets, you’ll include savings, investments, and any money coming in from surviving household members.

Example debts

• Mortgage

• Bills

• School fees

• Living expenses

Example assets

• Household income (not including your own)

• Savings

• Existing life insurance

• Investments

What’s the difference between term life insurance and other types of life cover?

Term life insurance isn't the only kind of insurance out there, but it is perhaps the most straightforward.

Term life cover pays a lump sum if you pass away, whereas other types of life insurance are designed to protect your finances if you experience an injury or are diagnosed with an illness that affects your ability to work.

What should I look for when comparing term life insurance policies?

On the surface, most term life insurance policies may look the same.

It can be tempting to look solely at the cost of a premium when choosing a policy, but there are other factors to consider.

To start with, consider the following:

• Benefit levels

• Limitations and exclusions

• Costs and fees

Once you've narrowed down your choices, look at the Product Disclosure Statement (PDS) for each policy to get a good sense of what you'd be paying for.

Some policies will not payout for death if it was related to a pre-existing condition, and most have a maximum policy age.

Comparing life insurance policies is a smart way to find one that offers you value for money.

Does term life insurance expire?

This depends on your policy, but in short, yes.

Although term life insurance is considered 'guaranteed renewable,' it can expire.

How does that work?

Once your policy is issued, your insurer cannot withdraw it if you become sick.

As long as you pay your premiums when they are due, your term life insurance should continue, no questions asked.

Your insurer cannot request a medical examination or deny you a renewal.

However, most insurers do have a policy expiry age.

This is a maximum age set by the insurer.

Once you reach this age, your life insurance will expire.

Generally this is set at 100 years old.

Is it easy for my beneficiaries to make a life insurance claim?

If something happens to you, and your loved ones need to make a claim, they will have to contact your insurer or super fund for details.

The process can be made easier if you have a legal will and share your life insurance policy details with your beneficiary.

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.