Four types of life insurance explained and how to choose

Life cover

Life cover is there to help you and your loved ones financially if you are diagnosed with a terminal illness or die. That can make it essential if you have people who rely on you financially such as a partner, children, siblings, nieces or nephews or ageing parents or friends. It’s especially important if you have a mortgage or other debts.

How much cover do you need? The Australian Securities and Investments Commission (ASIC) has developed a life insurance calculator that can help you work out the right level of cover for you and your family. Another way to come up with an accurate amount is to talk to a financial adviser. They’ll work with you to understand your current situation and goals for the future, ensuring your cover is right for your needs.

How is your policy paid out? When a life cover benefit is paid, it generally goes to the owner of the policy or a nominated beneficiary, such as your spouse, partner, children or other dependant.  If a beneficiary wasn’t named on your policy, the life insurance proceeds usually become part of your Estate. On some policies, you can nominate a beneficiary to receive the benefit (without going to your estate) – this may be helpful if your family does not accept your partner or significant other.

How is your policy structured? You can purchase life cover as a stand-alone policy or as a linked policy. A linked policy means it’s connected to total and permanent disability (TPD) cover and/or trauma cover, which may reduce the premiums you pay on these policies (but not life cover).

Linking policies can have implications at claim time. This is because if you’re paid out for one linked policy such as TPD, it will reduce the amount of the life cover sum insured by the equivalent amount. You may, however, be eligible to buy back this life cover in the future if your policy has this option.

Total and permanent disability (TPD) cover

Becoming unexpectedly disabled is not only a huge physical and mental shock – it can be financially challenging as well. You’ll have to come up with the money for medical care and perhaps modifications to your car and home. You may also have a significant earnings gap over your working lifetime. That’s why total and permanent disability (TPD) cover can be so valuable.

What happens when you make a claim? When you take out a TPD policy, you’ll usually get the option to choose a definition that will apply at claim time: own occupation or any occupation.

Own occupation means your insurer assesses your claim based on your ability to perform the occupation you were performing at the time of the illness or injury.  But if you select any occupation, your claim will be assessed against your ability to perform any job you are qualified or suited to, based on your education, training and experience.

TPD claims can take longer to assess than other types of life insurance. That’s because of the medical assessments and information needed to determine whether a disability will permanently prevent you from returning to work can take some time to obtain and for permanency to be established by your treating doctors, the insurers medical and other experts.

How is your policy structured? You can purchase TPD cover as a stand-alone policy or as a linked policy that’s connected to life cover or trauma cover, or both. This may reduce the insurance premiums you pay for TPD cover.

Linking policies can have implications at claim time. This is because if you’re paid out for one linked policy such as TPD, it will reduce the amount of the life cover sum insured by the equivalent amount. You may, however, be eligible to buy back this life cover in the future if your policy has this option.

Income protection cover

Income protection helps you safeguard one of your biggest assets – your ability to earn an income. It helps support you in the event you become injured or ill and are unable to work, with a regular monthly benefit to replace a percentage of the monthly income you'd normally be earning.

How much cover do you need? When you apply for income protection, you can choose a sum insured worth up to 70% of your before-tax income (excluding super contributions). We recommend speaking to a financial adviser to work out exactly how much cover you’ll need to maintain your lifestyle and cover any debts or bills.

How is your policy paid out? With income protection, you have a waiting period and a benefit period that determine when and for how long your policy will pay benefits.

The waiting period is the amount of time you’ll need to wait after consulting a doctor about an injury or illness before getting your first benefit payment. You can choose from 30, or 90 or 720 days. You may want to factor in any annual or sick leave from your employer when making your decision about the waiting period.

The benefit period is how long you’ll receive regular benefits while you’re eligible to claim. This may be based on a length of time (for example, two years) or an age (for example, until you are 65).

In general, shorter waiting periods and longer benefit periods are more expensive and will affect your premiums. It’s a good idea to consult your financial adviser before choosing what arrangements to make.

Trauma cover

Trauma cover is designed to support you while you recover from a serious medical condition, helping you pay for treatment, make any lifestyle changes, allowing time off work for your partner to support you, and to take care of everyday expenses.

What are you covered for? In general, trauma cover includes serious illnesses that are likely to require expensive medical treatment, have a significant recovery period, or force you to make major lifestyle changes. This may include serious conditions such as a heart attack and stroke. You can check your relevant Product Disclosure Statement to see a list of Trauma conditions that are covered under the policy.

How is your policy structured? You can purchase trauma cover as a stand-alone policy or as a linked policy connected to life cover or total and permanent disability cover, or both. This may reduce the insurance premiums you pay for Trauma cover.

How many times can you make a claim? Not everyone realises this, but you may be able to make multiple claims on trauma cover in your lifetime. That’s because there’s an option to reinstate your policy, usually 12 months after making a claim.

Just remember, it’s unlikely you’ll be able to claim for the same or related condition twice. There are also partial benefits that pay a lower amount for a shorter list of less severe conditions. To find out if trauma cover is right for you, speak to your financial adviser.