A Guide to Term & Whole Life Insurance

Life insurance is a financial safety net for you and your loved one, offering peace of mind by ensuring that you’re all financially protected in the event of your death. 

When it comes to the term insurance vs whole life insurance debate, that’s been moot since 1992. In Australia, only term life insurance is currently available, as whole of life insurance hasn’t been offered since 1992. There are distinct differences between these two types of life insurance.

What is Term Life Insurance?

Term life insurance is designed to pay a lump sum to your beneficiaries if you pass away or are diagnosed with a terminal illness. It’s a straightforward form of insurance intended to protect your family's financial wellbeing by helping them manage debts and living expenses in your absence.

The main features of Term Life Insurance include:

• Your cover period: Term life insurance covers you for a specified period (usually until age 99), as long as you continue paying your premiums.

• Premium options: You can choose between level, stepped, or hybrid premiums.

  • Level premiums stay the same throughout your policy term.

  • Stepped premiums increase as you age.

  • Hybrid premiums combine elements of both level and stepped premiums.

• Flexibility: Most insurers offer you the flexibility to adjust your cover amount based on your changing needs, though this may require underwriting (i.e. a medical exam or medical questionnaire).

• Automatic renewal: Your term life insurance policy renews annually, provided your premiums are paid, until it reaches its expiry date or you cancel the policy.

What are the benefits of stepped premiums?

• Affordability: Stepped premiums are usually cheaper at the beginning, making them attractive for young individuals.

• Flexibility: Allows young policyholders to secure cover without a significant financial burden.

Are there any drawbacks to stepped premiums:

• Increasing Cost: Premiums rise with age, potentially becoming unaffordable in the long term.

• Financial Uncertainty: Changes in personal circumstances, like moving to a high-risk area, can increase your premiums.

What are the benefits of level premiums?

• Predictability: Premiums do not increase with age, offering financial stability.

• Long-term Savings: While premiums are initially higher, level premiums can be more cost-effective over the long term as they do not rise with age, though they can rise in line with CPI or just because your insurer chooses to lift prices.

Are there any drawback to level premiums?

• Higher Initial Cost: Level premiums are more expensive at the outset, which may be a barrier for young individuals with limited financial resources.

The decision between stepped and level premiums depends on your financial situation, long-term goals, and personal circumstances.

Stepped premiums might suit you better if:

• You’re young and need affordable initial premiums.

• You plan to switch to a different policy as your financial situation improves.

Level premiums might suit you better if:

• You’re looking for financial predictability and stability.

• You intend to keep your policy for a long period, potentially saving on premiums in the long run.

Understanding the differences as well as the implications of choosing stepped versus level premiums for your life insurance is essential for making an informed decision that aligns with your financial goals and needs. 

Is Whole of Life Insurance available in Australia?

Not any more. Whole of Life Insurance was available in Australia until 1992 and provided lifelong cover plus an investment component. This form of permanent life insurance combined your death benefit with a savings element, accumulating a cash value over time.

The features that Whole of Life Insurance used to cover included:

• Lifetime cover: Unlike term life insurance, whole of life insurance provided cover for the insured's entire life, unless your policy was surrendered (i.e. canceled).

• Investment component: Part of your paid premiums were invested, accruing a cash value that you could access by surrendering the policy.

• Level premiums: Whole of Life premiums remained constant throughout the life of the policy.

• Cash surrender value: Policyholders could opt to surrender the insurance component of their cover and receive their accumulated cash value.

Term vs Whole Life Insurance Pros & Cons:

What is Life Cover?

Life cover is another name for Term Life Insurance. It’s also known as Death Cover. Life cover often includes terminal illness cover, which pays a lump sum if you're diagnosed with a terminal illness with a limited life expectancy. If you haven't named a beneficiary, the super trustee or your estate will determine where the money goes.

Is Term life Insurance the same as Accidental Death Insurance?

It's important to distinguish life cover from accidental death insurance, which only pays out if you die from an accident and not from illness, disease, or suicide. Accidental death insurance typically comes with numerous restrictions and exclusions.

As with any insurance policy, always read the product disclosure statement (PDS) to understand what is covered and what exclusions apply.

Do you need life cover?

If you have a partner or dependents, life insurance can help repay any debts and cover your family’s living costs in the event of your death.

If you don't have financial dependents, you might not need life cover, but should consider the following insurances in case of illness or injury: 

• Trauma insurance

• Income protection insurance

• Total and permanent disability (TPD) insurance.

How much life cover do you need?

To decide on the amount of life cover you need, consider the financial needs of your family and what resources they would have available to them if you weren’t able to earn an income. What are their:

• Financial needs: Calculate the amount required to pay off the mortgage, credit cards, other debts, childcare, school fees, and ongoing living expenses.

• Financial resources: Consider the money available from superannuation, savings, the sale of investments, paid leave balances, and support from extended family.

The difference between these figures is the amount of cover you should aim for. Use a life insurance calculator to help determine this amount.

How do you buy life cover?

First, check if you already have some life insurance through your superannuation fund. Super funds often provide default life cover at a lower cost than buying it directly. You can increase your cover level through your super fund if needed See our guide here.

You can also purchase life cover through:

• Financial advisers

• Insurance brokers

• Insurance companies

Life cover can be bought individually or bundled in with trauma, TPD, and income protection insurance. 

Important Note: If you bundle your life insurance policies like this, any payout from other claims may reduce your life cover amount. For example, if you’re total insured amount is for $1 million, and you make a claim for income protection cover which pays out $50,000 until you’re able to return to work, your beneficiaries’ total amount on your death will be $950,000.

To find out of your policy does this, check your PDS or consult your insurer for details. To avoid policies like this (which will mean paying a higher premium), speak directly to your insurer, or ask a trusted insurance expert.

How are life cover premiums structured? 

Premiums for life cover can be structured in two main ways:

1. Stepped Premiums: These increase annually as you age, reflecting the higher risk of claim.

2. Level Premiums: These start at a higher amount, but do not increase based on age, offering you more stable premiums over time.

Your choice between stepped and level premiums will affect both your current and future costs. Note that life insurance premiums can change annually regardless of the type you choose. 

How do you compare life insurance policies?

To ensure you get the best life cover policy, compare:

• Benefits and Features: What does your policy cover?

• Exclusions: What isn’t covered?

• Waiting Periods: How long must you wait before you can make a claim?

• Cover Limits: What are the maximum amounts you can claim?

• Premium Costs: Consider both current and future premiums.

A cheaper policy may have more exclusions or higher future costs. Check your insurer's website or PDS for detailed information. Also, compare the time different insurers take to pay claims and the percentage of claims they pay out.

What information do you need to provide to my life insurer?

When you’re applying for or changing life cover, insurers will ask about your:

• Age

• Job

• Medical history

• Family medical history

• Lifestyle habits (e.g., smoking)

• Participation in high-risk sports or hobbies

Providing accurate and complete information is important. Incomplete or misleading information can result in the cancellation or adjustment of your cover, or a declined claim.

Life cover is a vital tool for financially protecting your loved ones in the event of your death. Understanding the different aspects of life cover, including how to decide on the right amount, where to buy it, and how premiums work, can help you choose a policy that suits you, your goals for yourself and your family - and your budget. Ultimately, having life insurance, regardless of the type or premium structure, delivers a measure of financial security for your family in the event of an unforeseen tragedy.

Sources

https://moneysmart.gov.au/how-life-insurance-works/life-cover https://moneysmart.gov.au/how-life-insurance-works/life-c over https://www.investopedia.com/terms/w/wholelife.asp https://www.investopedia.com/term-life-vs-whole-life-5075430 https://www.nobleoak.com.au/life-insurance/term-life-insurance-vs-whole-life-insurance/ https://www.forbes.com/advisor/life-insurance/term-life-vs-whole-life-insurance/ https://www.tal.com.au/slice-of-life-blog/whole-vs-term-life-insurance-what-are-the-differences

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.