What is life insurance and how does it work?

Matthew Lang

Matthew Lang

Updated 10/01/2024

What is life insurance and why might you need it? This guide covers the ins and outs of life insurance in Australia, and how to find the right policy for you.

What is life insurance and how does it work?

What is life insurance?

Key Points

  • Life insurance is designed to provide you and your loved ones financial security if you were to pass away, become terminally ill or become unable to work as a result of illness or injury.

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

  • The level and type of life insurance cover you need depends on your circumstances and what stage you're at in life.

If you're new to the world of life insurance, it can be tricky to get your head wrapped around.

How does life insurance work, and is it really worth the cost? How do you find the right cover for your circumstances?

There's no one-size-fits-all solution when it comes to life insurance, so it's worth taking time to compare your options and speak to a professional to make sure you're not paying for anything unnecessary.

The good news, though, is that retail life insurers like those on our panel pay an average of 97% of claims in full -- so you know money spent today is likely to benefit you and your loved ones in the future.

So, where should you start with life insurance?

Read on to find out about the ins and outs of life insurance in Australia, and how to find the right policy for your needs.

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What is life insurance?

Life insurance is designed to provide financial protection if something unexpected occurs.

Depending on the type of cover and your policy, life insurance can provide you and your loved ones financial security if you were to pass away, become terminally ill or become unable to work as a result of illness or injury.

For example, if you work in a physically demanding trade job, such as construction, life insurance could ensure you were covered financially if you weren't able to work for an extended period due to an injury.

In a scenario like this, you might receive a monthly benefit to help pay for essential expenses like household bills and medical costs while you're out of work.

Income Protection

Income Protection

What are the types of life insurance?

Life insurance is an umbrella term for several types of cover, which can be bought separately or bundled in one policy. There are four main types of life insurance in Australia:

  1. Term life insurance: Also known as 'life cover' or 'death cover', it's probably what most people think of in relation to life insurance. This type of cover pays a nominated beneficiary, such as your partner, a lump sum if you pass away or are diagnosed with a terminal illness.

  2. Trauma cover: Also known as 'critical illness cover', this type of cover provides a lump sum of money in the event of a particular illness or injury, such as cancer or a heart attack.

  3. Total and permanent disability (TPD) cover: TPD cover pays a lump sum if you can't work again due to permanent illness, injury or disability. You can choose to be covered for the job you were working in or to be covered for any profession, although these vary in both the cost of cover and the threshold for payout.

  4. Income protection insurance: This type of cover pays up to 70% of your usual income, usually monthly, if you can't work temporarily as a result of illness or injury. Income protection insurance doesn't cover redundancy though, and can't be bundled with other products.

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How does life insurance work?

The life insurance products we've detailed above are designed to safeguard you financially in specific situations.

Most life insurance companies offer multiple products that cover different situations, such as if you pass away, if you're diagnosed with a terminal illness or if you can't work due to an illness or injury.

If you're interested in getting life insurance, comparing options from multiple insurers is one of the best ways to find a policy that fits your needs.

Once you have a policy in place, you pay a recurring fee to the company insuring you. This is known as your 'premium'.

In exchange, the insurance company agrees to pay money to you or a beneficiary, such as your partner or children, in the circumstances laid out in your policy.

A life insurance policy's product disclosure statement (PDS) lays out exactly how a specific policy works, including:

  • What's covered and what's excluded

  • The amount (premium) you'll need to pay, and how this could change over time

  • What information you'll need to provide to the insurer

  • Whether there's a waiting period before you can make a claim

  • How to make a claim

  • How to dispute or complain about the claims process

There are differences between policies and insurers, so it's a good idea to read over a life insurance policy's PDS before committing to it.

Why you may need life insurance

There are lots of reasons why you might need life insurance, but generally speaking, it can provide peace of mind that you and your family would be financially covered if something unexpected were to happen to you.

As mentioned above, there are multiple types of life insurance cover, and each provides financial protection in the event of certain circumstances like death, illness, disability or injury.

For example, if you work in construction and suffer a serious injury, income protection insurance could provide a monthly payment to help cover the bills while you're out of work.

Or if you were to be diagnosed with a serious illness like cancer, trauma cover could help relieve the financial burden of treatment by providing a lump sum payment.

So, is life insurance worth it? Every person's situation is different, but it's worth considering the financial impact if you were to suddenly lose some or all of your income.

If you think you or your loved ones would benefit from financial protection in any of the above circumstances, life insurance could be a sensible investment.

The advantages of having life insurance

Deciding whether or not to invest in life insurance isn't easy.

Fortunately, comparing your options from multiple insurers not only ensures you're getting cover that's right for your situation, but also that you're getting the best value for money.

If you're not sure whether life insurance is right for you, it's also worth considering the potential benefits:

Provides financial security for you and your loved ones

The reality is that life insurance comes at a cost -- and one that can easily be overlooked when there are more pressing expenses to consider.

But it's important to remember that life insurance is a long-term investment in your future.

If something unexpected were to happen and you could no longer earn income, life insurance can help cover important costs such as:

  • Loan repayments, e.g. mortgage and car payments

  • Ongoing expenses like groceries and transportation

  • Funeral or medical costs

  • Outstanding debts

  • School fees

Covers unexpected costs of illness and injury

Although we may not like to think about it, serious illness and injury are an unfortunate reality for many.

Half of all Australians will be diagnosed by cancer by the age of 85, while one in two people report having a chronic disease.

The financial burden of illness and injury can be significant.

Life insurance can reduce the strain on your finances during an already stressful time.

Offers peace of mind knowing your loved ones will be looked after

No one wants to be in a difficult financial position while they're grieving or going through a rough time.

Life insurance can help take the pressure off and provide financial support for your loved ones during some of life's toughest moments.

When you might want to review your life cover.

Life insurance isn't a set and forget product. Make sure your cover matches your life stage. These are common reasons to check your level of cover:

  • If you have children (or other dependents)

  • If you get married

  • If you buy a house

  • At birthday milestones

  • If your health changes

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How can you find life cover that suits your situation?

Every policy has something different to offer.

If you do decide to buy life insurance, there are a lot of options out there, and you have the flexibility to choose a policy that suits your specific circumstances.

For example, if you're young, single and healthy, you might decide you just want income protection insurance only as a financial safety net in case you're ever out of work due to illness or injury.

But if you're older or have a family, you might choose a more comprehensive life insurance bundle that provides protection for you and your loved ones in a broader range of scenarios, such as if you pass away, become terminally ill or can't work due to illness or injury.

Each person and their corresponding policy is different.

It's worth taking a bit of time to assess your own situation before starting to compare your options.

What's the right life insurance cover for you and how much should you get?

The level and type of life insurance cover you need depends on your circumstances and what stage you're at in life.

For example, if you have major financial responsibilities like a mortgage or dependent children, you might choose a level of life insurance that would pay a significant lump sum and provide financial protection if you were to pass away or become seriously ill.

If you're relatively young and have fewer financial commitments, you might choose income protection insurance that would provide a monthly payment if you couldn't work due to illness or injury.

As a general rule of thumb to work out the type of cover that may be right for you, think about how much you and your loved ones would need to be financially comfortable if you were no longer able to contribute to your household income.

You'll need to consider expenses such as:

  • Mortgage and other debts

  • Childcare and education expenses

  • General living expenses such as groceries and transportation

  • Potential future expenses such as medical bills

Also consider the circumstances in which financial protection would be most important to you and your loved ones.

Depending on the policy you choose, life insurance can provide financial security in situations such as death, illness, injury and disability.

You may want to opt for cover that provides protection in one or more of these situations.

Keep in mind that once you choose a life insurance policy, it isn't set in stone.

You have the option to change your level of cover or even switch policies altogether as your circumstances change.

Ultimately, finding the 'right' life insurance cover depends on you.

Comparing your options and talking to one of our specialists at Compare Club can help you find a suitable policy from our panel of trusted insurers, at the right price to suit your circumstances, both now and in the future.

How to get life insurance

In Australia, there are a few ways to get life insurance.

Find a policy yourself

You can often find the best cover by comparing policies and working out which one is right for you based on:

  • Benefits and policy features

  • Exclusions and limits on cover

  • Waiting periods before you can claim

  • The cost of premiums and how they may change over time

In many cases, this approach gives you the flexibility to find exactly what you're looking for at an affordable price.

Through an adviser or broker

A financial adviser or broker can assess your financial situation and offer guidance on the best cover for your needs, although there are some advisers and brokers who operate on a commission basis and may try and sell you more than you really need.

At Compare Club, however, our life insurance specialists don't get paid for recommending specific products, so our goal is simply to find the best deal and policy for your situation.

Through your super fund

Life insurance cover is sometimes available through your superannuation fund, where premiums are deducted from your super contributions.

Cover options are usually limited to the policies offered by the insurer that works with your superannuation fund.

It's important to note that, in many cases, if you make a claim on life insurance through your super fund, the money is paid into your super account.

This can make it difficult to withdraw before you have access to your super, which is usually at age 65.

Some life insurance companies allow you to 'super-link' your policy.

This means approximately 95% of your premium is deducted from your super balance and 5% is paid out of pocket.

In these cases, if you need to make a claim, the money is paid into your nominated bank account rather than your super account.

What can you expect when you purchase life insurance?

When you apply for life insurance -- whether life cover on its own or bundled with other cover such as income protection or TPD -- the insurer will typically ask for information about you, including:

  • Your age

  • Your job

  • Your medical history

  • Your family's medical history, such as a history of disease

  • Your lifestyle, for example if you're a smoker or take part in high-risk hobbies like skydiving

The insurer will use this information to evaluate your application, work out your premium and determine the terms and conditions of your policy.

For example, your premium amount is likely to be higher if you're a smoker.

Once you have an active life insurance policy, you'll stay covered as long as you pay your premiums on time until the policy expiry age.

This age varies across insurers and products, and will be outlined in your policy's product disclosure statement (PDS).

Typically, you can change or cancel your policy by getting in touch with your insurer and giving the amount of notice required.

For example, you might decide to increase the amount you're insured for (the benefit amount) after taking on a significant financial responsibility such as a mortgage.

If you think you could be getting a better deal out of your life insurance, you can also compare quotes online and switch policies through Compare Club.

What happens if you need to claim?

In an ideal world, you'll never need to make a claim on your life insurance. But unexpected events can happen, and if you do ever need to make it a claim, it's handy to know how the process works.

You can find out how to make a claim by talking to your insurer about their claims process.

Depending on the type of cover you have and the reason you're making a claim, you may need to provide information such as:

  • Medical reports and/or medical test results

  • Work details, such as physical requirements, and how many hours you work each week

  • Payslips and tax returns, or financial statements if you're self-employed

  • If the policyholder has passed away, a death certificate or medical report listing the cause of death

If you're claiming due to illness or injury impacting your ability to work, you may need to provide information to your insurer on a regular basis through progress claim forms.

Making a claim on term life insurance, trauma cover, TPD or income protection cover often coincides with stressful life events.

Fortunately, the vast majority of claims made with retail life insurers (like those on our panel) are paid in full.

With this in mind, life insurance can be a responsible investment and offer assurance that you and your loved ones will be financially protected if something unexpected happens.

Do you think you'd benefit from life insurance? Or do you think you need to review your current policy?

Compare policies now or talk to one of our life insurance specialists about finding the cover that best fits your situation and your budget.

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The information contained in this guide is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. As such, it is important that you consider the appropriateness of any advice and the relevant product disclosure statement (PDS) before proceeding. Check with a financial professional before making any decisions.

Heart Foundation, Australian Heart Disease Statistics, August 2020Cancer Council, Cancer Statistics in Australia, August 2020

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.

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Matthew Lang

General Manager of Life Insurance