Life insurance FAQs

Life insurance is a product designed to provide you and your loved ones with a lump sum amount in the event you are diagnosed with a terminal illness or you die. It’s also known as term life insurance or death cover. Other types of life insurance – such as income protection, trauma, and total and permanent disability (TPD) – also come under the life insurance cover umbrella but they cover different types of events.

Unfortunately, we never know what’s around the corner and if you are the main financial provider, it can be reassuring to know that your family will be well taken care of if you die and have life insurance. We don’t always have adequate savings to cover important things like a mortgage or the kids' school fees for months or years, so holding a life insurance policy provides you with this peace of mind. Most people nominate their spouses or children as the beneficiaries in their life insurance policy but you can also choose your parents, business partners, siblings or your estate.

If you have financial dependents, a mortgage to pay off or debts to clear, holding a life insurance policy can be a worthwhile part of your financial protection plans. You may think you’re too young for life insurance or that life insurance costs too much, but when you think about the real cost of not having it, you may find it’s something you don’t want to do without.

This depends on your personal circumstances and what stage of life you’re at. A general rule of thumb is to have enough insurance to ensure your loved ones can maintain their same standard of living if you pass away. When calculating the amount, consider what you already have with regard to super, savings, and assets such as shares. Then calculate what your family needs in terms of covering the mortgage or any other loans, school fees and general living expenses.

Unfortunately, research by Rice Warner found there is a severe underinsurance gap where, in many cases, a person’s life cover was too low to meet their family’s basic needs. There are many online insurance calculators that can help determine how much you need, such as this one on MoneySmart’s website.

Your insurer will generally determine how much cover you can take out, which is based on a number of factors such as your age, income and occupation. The usual minimum amount is $100,000 although there are some that will provide cover from $50,000, and up to $1.5 million in cover depending on the provider.

The cost of life insurance in Australia is determined by your health, whether you’re a smoker, age, occupation, and the amount of cover you want. Usually life cover costs more for men. One way you can reduce your premiums is to quit smoking. Also, if you no longer have children as dependants, you may not need the amount of life cover you initially took out. If you feel you are paying too much, you should consider shopping around to see if you can get a better deal.

COVID-19 has certainly focused attention on our finances. Not only are we more aware of needing emergency money for rainy days, but we want to know if our insurance will protect us from events such as a pandemic. Generally, life insurance does cover you for COVID-19 as long as you are outside the qualifying and waiting periods that are set out in your policy and meet certain conditions.

Yes. Many insurers may be able to fast-track a proportion of your life insurance cover within a few days of receiving evidence of your death, such as a death certificate. This can help pay for a funeral or associated expenses while your overall claim is being assessed.

Most life insurance policies include terminal illness cover and will provide you with an early payment if you have been diagnosed with a terminal illness and are not expected to live for more than 12-24 months. Some insurers will pay out your entire life cover while others will have a limit. To claim, you will need to provide your insurer with copies of relevant medical and test reports.

Most insurers require you to answer general medical questions but if you want to apply for a high level of insurance, you may be asked to undergo a medical exam. If you don’t want to undergo an exam, you can still get life insurance at the amount you want but you may find your premiums will be higher. Generally, the more comprehensive the cover, the more information you will need to provide before an insurer determines whether to offer you cover and on what terms.

It’s always advisable to have a will to ensure your assets go to the people you want them to. However, a will cannot override your life insurance beneficiaries so even if you haven’t written one, the beneficiaries you’ve nominated on your life insurance policy will receive the payout.

If this happens you need to contact your insurer. They will provide you with a ‘change of beneficiary’ form which you should fill out as soon as possible.

Life insurance payouts are usually tax free if they go to your financial dependants. However, if your benefits are going to non-dependants, it’s best to seek advice from your tax adviser as tax may be payable in this situation.

The Australian Tax Office (ATO) generally only allows tax deductions for premiums if the insurance cover relates to earning assessable income. This means premiums for a stand-alone life insurance policy are not tax deductible. Income protection insurance is one type of cover where tax deductions are allowed.

Yes, some insurers do allow you to have a joint or ‘multi-life’ policy. It’s usually taken out by spouses or partners, and allows for different amounts of cover for each partner. Generally, insurers will require you to nominate your partner or spouse as the beneficiary. 

Most insurers allow you to take out cover up to a certain age, which is known as the ‘maximum entry age’, and is generally between 60-75. As each insurer has different age and cover limits, make sure you read the insurer’s Product Disclosure Statement (PDS) to see if you meet their eligibility requirements.

Once this happens the nominated beneficiary needs to contact the insurer and notify them of the death. The insurer will then send through the necessary forms for them to complete in order to receive the payout. If you haven’t nominated a beneficiary, your insurer will pay out the proceeds to your estate.