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How does life insurance work?

Published 7 January 2019

Many Australians can't make an informed decision about life insurance because they don't understand it.

Are you unclear about exactly how life insurance works? You’re not alone.

A 2018 report by the Australian Securities and Investments Commission into Australians’ experience with life insurance found that most people surveyed “knew only a little or nothing about life insurance”, leading to inadequate or inappropriate cover for their circumstances.

Coupled with this, a 2016 international comparative study by Oxford University found that Australians in particular underestimate their risk of death, serious injury or critical illness, and have unrealistic expectations of receiving government support should they require it.

This combination of factors results in Australians being alarmingly unprotected from adverse life events compared to people in other developed nations. So it’s vitally important to become informed, so you can decide whether life insurance is something you need – and, if so, what type and what amount is right for your circumstances.

What is the purpose of life insurance?

In a nutshell, life insurance allows you to proactively protect yourself and your family against the financial impacts of your death, serious illness, injury or other loss of earning capacity.

If there are people in your life who depend on your income – including you, your partner, your children and any other dependents such as aged parents or other relatives – life insurance can mean the difference between their continued financial security and sudden financial hardship or even outright poverty.

As ANZ financial planner Emma Hickling puts it: “It represents the capacity for your family to live the life you planned for them.”

What does life insurance cover?

There are actually different types of life insurance, each of which protects you and/or your family in different ways.

  • The type properly known as life insurance (also known as term life insurance or death insurance) provides a lump-sum payment to your dependents in the event of your death or, in some cases, on diagnosis of a terminal illness.
  • Critical-illness insurance (also known as trauma insurance) covers the financial impacts of certain serious medical conditions – which are defined and covered differently by different policies.
  • Income-protection insurance (also known as salary-continuance insurance) replaces a proportion of your regular income if you become temporarily unable to work due to an injury or illness. Insured events, waiting periods, amounts paid and maximum coverage periods (also known as the benefit period), all vary between policies.
  • Total and permanent disability (TPD) insurance supports you if you become permanently unable to work due to an injury or illness.
  • Funeral insurance covers the often significant costs relating to your funeral, and can also be used to cover any unpaid debts or bills you leave behind.

How much does life insurance cost?

Your premiums are calculated depending on the type and amount of cover you’ve chosen, as well as your personal circumstances including age, health and occupation. Income protection premiums can be affected by additional factors.

When you take out a life insurance policy, you can choose the amount of cover your family would need to continue meeting its financial obligations. These obligations might include the mortgage and/or other loan repayments, school fees, utility bills and everyday living costs.

How does life insurance pay out?

Depending on your type of policy, your family might receive a lump-sum payment once they’ve submitted a valid claim on your policy. Refer to the Product Disclosure Statement (PDS) for details.

Some policies will pay out a small amount immediately to cover your funeral and other urgent costs, before paying the balance once the claim has been fully processed.

Which type and amount of life insurance is right for me?

This will depend on your circumstances, but in general the aim of life insurance is to ensure your family could maintain their current lifestyle if your income were to stop coming in or you were no longer there.

Beware what financial research firm Rice Warner calls the “underinsurance gap”: among Australians of working age “the median level of life cover meets only 61 per cent of basic needs”. People left in this position will find themselves having to consider significant changes to the way they live, including returning to work, selling the family home, moving the children to public schools and cancelling family holidays.

To determine what type and amount of cover you might need, consider the following questions.

  • What is your current income?
  • Who currently relies on that income?
  • What potential events do you want to protect them from?
  • What debts do you have, including mortgages, other loans and credit cards?
  • What ongoing living expenses do you have, including school fees and other regular bills?
  • What savings do you have that could be used to cover some of these expenses?
  • What assets do you have that could be sold to cover some of these expenses?
  • What other insurance policies do you already have (including through super) that would cover some of these expenses?

Some final tips to keep in mind

  • Discuss insurance with everyone who would be affected by losing you, to develop a realistic idea of what financial support would be required.
  • ASIC’s MoneySmart website recommends considering insurance for both members of a couple, not just the main income earner – if you have children and the primary caregiving parent dies, the other parent might need to pay for childcare.
  • Read the policy's product disclosure statement carefully, and seek independent advice.
  • Review and update your policy regularly as your circumstances change. When your renewal notice arrives is a good time to do this.

Life insurance can help you to protect the people you love – but only if you understand it, choose the right type and amount for your circumstances, and keep it up to date.


Want to protect your loved ones from the unexpected?

Discover Ezicover Life Insurance

We’ve partnered with Zurich Australia - one of Australia's largest and most experienced life insurers - to help you take care of yourself and the ones who rely on you.

Find out more

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This information is current as at date of publication and is subject to change.

The issuer of this information is ANZ. While ANZ has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability arising from your use of this information.

ANZ has entered into a long-term strategic alliance agreement with Zurich Australia Limited (Zurich), ABN 92 000 010 195, AFSL 232510 of 118 Mount Street, North Sydney, NSW 2060, the issuer of Ezicover insurance products. Ezicover is a registered trademark of Zurich. The issuer of Ezicover insurance products is not a Bank. Although ANZ distributes these products, these products are not a deposit or other liability of ANZ or its related group companies. 

Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522 AFSL 234527 is an authorised deposit taking institution (Bank) under the Banking Act 1959 (Cth). The issuers of these products are not Banks. Although ANZ distributes these products, these products are not a deposit or other liability of ANZ or its related group companies. None of them stands behind or guarantees the issuers or the products. 

This information is of a general nature and has been prepared without taking account of your objectives, financial situation or needs. You should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs.