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Types of life insurance

Published 9 October 2018

‘Life insurance’ is often used as a broad term to describe quite different forms of insurance relating to life events, such as getting sick or passing away. 

Here’s a list of some of the types of insurance that get lumped into this category.

  1. Life or term life insurance
  2. Critical illness or trauma insurance
  3. Income-protection insurance
  4. Total and permanent disability insurance
  5. Funeral insurance

1. What is life or term life insurance?

Life or term life insurance products are designed to provide a lump sum payment if you were to pass away or, in some cases, an early payment if you’re diagnosed as terminally ill.

Life insurance is often taken out by those who have financial dependants – such as a partner, children or aged parents – who would be affected if they were no longer around.

2. What is critical illness (trauma) insurance?

Critical illness insurance, also known as trauma insurance, can provide cover for a covered serious medical issue. (Think cancer, a heart attack, a stroke or a severe injury.) Check which particular illnesses an insurer covers, and the definitions of each condition in the policy, as insurers differ in how they classify these conditions.

We all face the possibility of suffering a life-altering medical emergency. People generally take out critical illness insurance to ensure they can concentrate on their recovery, rather than having to worry about their finances, in the event of a health crisis.

This type of cover can either be purchased as a policy on its own, or as an optional benefit in a term life insurance policy.

3. What is income protection insurance?

Income protection insurance (or salary continuance) can be paid if a serious illness or injury prevents you from being able to earn an income for a period of time. Waiting periods apply for when you will need to be off work before you become eligible to receive payment. These often range from 30-90 days. Claimants are generally paid a proportion of their standard income depending on the type of cover (generally no more than 75-80 per cent of their income) during the period they are unable to work or until the end of their nominated benefit period, whichever comes first. You can usually select a benefit period when you apply for cover from 6 months through to age 65.

There are two main styles of income protection insurance, Indemnity and Guaranteed/Agreed value. Indemnity income protection policies are based on your income at the time you take out the policy, and claims are assessed based on the lesser of your pre-claim earnings, and your nominated cover amount. Proof of income is required at the time of your claim for Indemnity policies. For Guaranteed/Agreed value income protection policies, your amount of cover is agreed upfront at the time you apply, regardless of whether there are any changes in your income. You will be required to provide proof of your income up front for Guaranteed/Agreed Value policies and it is generally more expensive than an Indemnity policy.

Income protection insurance is for those who want the security of knowing they’ll still be able to cover their expenses or maintain their lifestyle following a health-related setback. Many Australians don’t have much of a financial buffer. Those with income protection insurance have the reassurance that they can still have an income stream if an illness or injury prevents them from performing their regular occupational duties.

Generally, costs you incur directly related to your ability to earn an income can be tax deductible. This may include some premiums under income protection policies. While some of the premiums may be tax deductible, you should also be aware that any claim you are paid may be treated as taxable income.

4. What is total and permanent disability insurance?

Total and permanent disability, often referred to as TPD, insurance can cover you against the possibility of not being able to ever work again due to an injury or illness.

There are two types of TPD insurance. One type will support you if you are unable to work in your own occupation. The other (cheaper) type will only provide a payout if you are unable to work in any occupation you are suited to based on your education, training and experience.

TPD insurance is often purchased as an ‘add on’ to a life insurance policy.

5. What is funeral insurance?

The cost of a standard funeral in Australia ranges from $4,000 to $15,000disclaimer. To assist their bereaved family or friends with these sudden costs, some people take out funeral insurance. This provides a lump sum, which can be used to pay for expenses such as the funeral director’s fee, or other funeral expenses and can generally be paid very soon after receiving the completed claim requirements.

An important consideration when you take out funeral insurance is whether you choose a policy that offers capped or uncapped premiums. Some funeral insurance products allow you to choose from both options, depending on what suits you best.

Capped premiums mean you stop paying your regular insurance premiums when you’ve reached your nominated cover amount, after that your cover continues free, for life. This means you will never pay more in premiums that your cover amount.

Uncapped premiums are where you pay premiums for life (or until an age specified by the insurer). This means, if you take out your policy too early you run the risk of paying more in premiums than your beneficiary or estate would receive in benefit payments.

Find out more about ANZ Life Insurance

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