Life or personal insurance may provide you and your family protection if you or your partner lose your job, are diagnosed with a life-changing illness or injury or pass away. This type of insurance can help by providing a financial buffer for your family, which can be particularly important if you have dependents. You can get personal insurance through your superannuation fund or you can take it out separately.

There are four types of personal insurance, they are:

  • Life cover
  • Total and permanent disability cover
  • Income protection
  • Trauma cover

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What is life cover?

When you have life cover, which you may already have through your super fund, your insurer may provide a lump sum to the people you nominate in the event that you pass away. The insurer may also release this money sooner if you become terminally ill, but this depends on your policy.

You need to know:

How much life cover you or your loved ones are entitled to under your policy

You'll also want to consider whether this would be enough for your dependents if you passed away. Work out how much life cover you need then get in touch with your fund to increase or decrease your cover.

When you or your loved ones can receive that lump sum or payout

Getting the money sooner could help you to pay for home care or other costs if you became terminally ill.

Who you have nominated to receive the money when you die and whether those nominations are legally binding 

The people you nominate to receive the money when you die are known as your ‘nominated beneficiaries’. If your nomination is binding or non-lapsing, then it is legally enforceable and cannot be changed after you die.

Whether you should pay for ‘stepped’ or ‘level’ premiums 

This will change how much you pay in premiums as time goes on. Read more about the difference between level and stepped premiums.

What is total and permanent disability cover?

Total and permanent disability (TPD) cover pays you a sum of money if you become totally and permanently disabled and are unable to work. If you become totally and permanently disabled – keep in mind this definition can change from one policy to the next – and you claim this money, you could use it to help pay for rehabilitation costs, living expenses and paying down debt.

TPD cover can be complicated, so it’s very important that you read your Product Disclosure Statement in full and ask as many questions as you need to before you sign up. TPD cover is usually purchased with life cover, although it is possible to take it out separately.

You need to know:

How total and permanent disability is defined by your insurer and under your policy

This can vary from one policy to the next. Total and permanent disability can be defined as being ‘unable to work in your usual occupation’ or ‘unable to work in any occupation’, for example.

How much you are covered for and how long it will take your insurance provider to pay you the money

You can use ASIC’s Insurance claims comparison tool to see how different insurance providers accept and handle claims and how soon they pay them

What is income protection?

If you have income protection, which is also known as salary continuance, your insurance provider may pay you a regular income if you become unable to work due to illness or major injury.

You usually get about 75% of your regular income, which is paid out in instalments like a salary.

You need to know:

How ‘being unable to work’ is defined and what criteria you need to meet in order to make a claim

As with Total and Permanent Disability (TPD) cover, the definition of being ‘unable to work’ can vary from being defined as ‘unable to work in your usual occupation’ or ‘unable to work in any occupation’. It’s also worth checking whether mental health issues are covered.

How much you are covered for and how long your insurance provider will take to pay out the money you’re entitled to

When it comes to income protection, it’s likely you will want to start receiving payments quickly as you may have health or rehabilitation costs to pay for on top of your everyday expenses, so check if there’s a waiting period. Try using ASIC’s Insurance claims comparison tool to see how different life insurance providers accept and handle claims and how soon they pay them.

Whether to get ‘agreed value insurance’ or ‘indemnity policies’

 Under agreed value insurance, you’re able to nominate a fixed claim benefit of up to 75 per cent of your income at the time of taking out the policy. Agreed value policies may be more expenses, although they can come in handy if there’s a chance your future income could drop. Indemnity policies adjust your benefit value to reflect your income at the time you claim. Indemnity policies may be cheaper, but could mean you get less money back if you drop down to part time work or become unemployed.

How long the income protection cover is set to last you

With some policies, you may be covered from two to five years, while with other policies you may be covered until you turn about 65. The length of your cover will impact the price of the insurance premiums. In general, the more you pay, the longer your insurer will pay you an income.

What is trauma cover?

With trauma cover, your insurance provider may pay you a sum of money if you are diagnosed with or experience a life changing illness or injury – such as cancer, heart attack, coronary bypass or stroke – and you make a claim on your policy.

You need to know

How a life changing illness or injury is defined by your insurer

If you have private health insurance, you should also factor in what you are covered for under your private health insurance policies to make sure there is no overlap in terms of what you’re paying for.

How much you are covered for and how long it will take your insurance provider to pay you

You might need money quickly to cover health and rehabilitation costs. Again you can try using ASIC’s Insurance claims comparison tool to see how different life insurance providers accept and handle claims and how soon they pay them out.

What your insurer needs to know

Your insurer needs to know details about your health, work and recreational activities. If you’re not up front with your provider, your claim can be knocked back.

Health

If you take out a life insurance policy, you have a duty of disclosure, which means you are required to tell you insurer, for example, if you are a heavy smoker, have a serious health condition or a terminal illness. You can get cover for pre-existing conditions but may need to pay more.

Work and play

You also need to tell your insurer if you work in a risky environment or take part in risky recreational activities. If your job requires heavy manual labour, you are deemed riskier than if you work in an office. If you take part in adventure sports such as bungee jumping or car racing, you also need to tell your insurer. 

Things you should know

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.