Term Life Insurance in Australia - What Does it Cover?
Term Life Insurance policies have replaced Whole Life policies as the primary insurance type offered within Australia. Applicants are able to decide upon the term they would like to take out their life cover for at the time of application. A lump sum benefit is paid to the policyholder or their beneficiaries in the event of their death or if they have been diagnosed as having a terminal illness and are not expected to live for a period longer than 12 months. This benefit payment can ensure the policyholders beneficiaries can maintain their current way of life by helping them cover any outstanding debts and keep on top of everyday expenses.
What is Term Life Insurance?
Term life insurance provides cover for your financial obligations in the event that you pass away or are diagnosed with a terminal illness. Term life insurance policies will often include the following features:
- A lump sum benefit payout. When you take out a term cover policy, you are paying for an agreed benefit amount which will be paid to your family when you die. The term life insurance benefit will be paid as a lump sum amount, so that your family can use the money to pay off debts such as the mortgage or credit cards, as well as use the money as an income to pay ongoing bills to maintain their lifestyle and goals, such as your children’s education.
- Advance payment for terminal illness. If according to a medical practitioner you are expected to die within 12 months, your policy can pay out the benefit as an advance payment to help with final medical expenses.
- Renewable. Most policies can be renewed until you reach the age of 99, however, you may not have to renew your policy after you retire, if you have a healthy retirement investment.
- Few exclusions. Most plans will have just one exclusion, where the policy won’t pay out if your death is the result of suicide in the first 13 months. Apart from that if you have been honest and detailed on your application, your family will usually be able to rely on a cash payout when you die.
- Extras available. Since your death is not the only circumstance which could leave your family unable to rely on your income, and so you can add extras to your term life insurance policy such as total and permanent disability insurance and trauma insurance, which can pay a percentage of your income if you are unable to work because of an illness, injury or accident.
Term Insurance vs Whole of Life Cover
Before the advent of superannuation, whole of life insurance was the more popular insurance choice. Whole of life policies are made up of term life protection and savings, however, the savings portion has never been competitive with other forms of investment and the same remains true today.
Although it is important that you insure your life in order to protect your loved ones from inheriting your debts, or because you want to give them enough funds so they can continue on with their lives in a financially secure manner, there are many other investment methods which will offer you a better return than whole of life insurance.
Another downfall of a whole of life insurance policy is that the only way you can access the money you have saved in the investment portion of the policy is to cancel the policy, but when you do this your life cover lapses and you are then uninsured.
Your best option is to treat your life insurance needs differently to that of your investment plans. Never mix the two. You will be much better off financially by taking out term life insurance for the amount you need over the period you require, and then investing whatever you can afford in other ways which will return a much better dividend.
Whole of life insurance policies can still be useful, for example if you are marrying late in life, say in your 40s as it is about that time that term insurance starts to get dearer as the risk of you dying before the term expires becomes greater. Therefore, whole of life insurance can become valuable at this stage, as long as you intend to keep it going for life. You will only truly benefit if you keep your policy because it takes around 20 years for the investment portion of a whole of life policy to show any real gain, and in the meantime you will have received adequate life insurance cover.
20 Year Term Life Insurance?
Premiums will cost you more as you get older, this is because as you age you pose a greater threat to the life insurance company that faces the chance of having to pay out a rather large lump sum benefit should you die. This also poses a dilemma for you when you apply for your policy, as the longer the term you take the cover out for the more it will cost you. This means a policy taken out for 10 years will have a lower premium cost than a policy taken out for 30 years, one of the main reasons most people choose the middle ground and decide on a 20 year term.
A 20 year term life insurance policy gives you an ideal length of cover as regards mortgage protection, it's also a term you can be comfortable with if you plan to keep working for a further 20 years before taking retirement. Although a 10 year term might be cheaper, you'll most likely find much of the financial protection you needed when you first acquired it will still be there when the 10 year term expires and it will cost you a lot more to renew it for a further 10 years.
Features of Competitive Term Life Insurance
The term of your life insurance could be 10, 15, 20 years or more, depending on the life insurance company you choose, but in all cases your premium payment for that period of time will remain fixed. All you need do is to make the required premium payments when they are due and you will remain covered for the amount agreed upon in your insurance contract.
Then, when the term expires so does your cover. This is similar to the way general insurance works on your car or house for example. If your house or car should suffer damage through fire or accident while your insurance premiums are up to date, you will receive retribution for the loss. Similarly, if you should die during the term of your insurance your beneficiaries would receive the amount you were insured for. However, if your term life policy were to expire and nothing happened during the period of cover that required a claim, the policy simply lapses.
In reality most insurance companies have a structure where, as the existing term life insurance policy is due to expire, you can automatically gain new coverage with an ongoing policy, albeit at an increased premium which represents the difference in your age from when the initial policy was taken out. If you don't want to pay the increased rate you can opt to lower the cover.
Who Can Benefit from Term Insurance?
Term insurance is of particular advantage in the following situations:
- Replacing an income for your partner or your family that would be lost if you were to die.
- Corporate protection against the loss of an important employee through unexpected death.
- Business protection on the life of a business’ partners.
- To cover debts such as mortgage, bills and funeral.
- To fund your children's further education if you were to die.
- The payment of childcare costs if the death of a spouse means the other parent needs to return to work.
Disadvantages of Term Life Insurance
As with any insurance product, its tailored features can mean that term protection presents certain disadvantages in some circumstances, so make sure you are aware of:
- No cash value. One reason that term life insurance is cheaper than whole of life insurance is that it doesn’t accumulate an investment portion. This means that your insurance policy does not accrue any cash value, so if you out live the term of your term insurance, and die after the term has expired, your beneficiaries don’t receive any cash out or death benefit. Therefore, if you survive your policy you don’t see any return on the premiums you have paid.
- Regular renewals and rising costs. As a policy is only valid for the term you’ve chosen, when the policy expires at the end of that term you need to take out a new policy if you want to continue to be covered. However, at the end of the term you are older than you were when you first applied, and may have seen other health and lifestyle changes too, all of which can combine to make renewing your policy more expensive. Plus, term life insurance is not a set and forget insurance product, as you need to go through the application process again and again at the end of each term.
- Inflexible terms and conditions. The terms and conditions you agree to and sign up for when you take out your cover, are those which will bind you and your policy until the end of the term. This means that if your circumstances or needs change during the term you cannot adjust the inclusions or benefit amount of your policy in the same way you can with a whole of life policy.
The biggest benefit of taking out term insurance is age. It doesn't matter whether you are a smoker or non-smoker, man or woman, the younger you are when taking out term life insurance the cheaper it will be. Term insurance remains one of the most appropriate insurance options for family protection as it offers a low cost, high cover protection when you need it most. It can be taken out over different terms so you can have a higher cover when your responsibilities are at their greatest, such as when raising a family or buying a home.
When Should I Buy Term Life Insurance?
If you have anyone who depends on you in any way, then you need to consider some form of life insurance to protect your loved ones when you’re no longer around to look after them yourself. However, when it comes to the type of life insurance, you should term cover if:
- You only need cover for a finite time. If you have savings and investments in place for your retirement, and a regular savings plan to build and emergency fund and the money you need for holidays and home renovations, then you and your family are probably living within your means, and spending less than you earn. However, that doesn’t mean that you’ll be able to maintain that lifestyle with no income at all. Instead you can protect those particularly important times of your life with term life insurance, such as when your children are in school or going to university, or when your mortgage is at its highest. Then, when your expenses return to a more moderate level, your term insurance can expire, as your family will be under less financial pressure if you die.
- You are on a tight budget. If you manage your budget carefully you will want to keep a tight rein on every dollar you spend, so term life insurance can be a much more attractive, smaller commitment.
- You want to reserve the option to convert. Many policies can be converted into a whole of life policy which will cover you until you die, or you reach retirement age, and carry an investment value. Therefore, you can easily have your family covered with term life insurance, and still leave the option open for more comprehensive cover down the track.
- You want to make your own investments. Whole of life insurance has its own investment component, however, if you want to be in control of your investments, and you already have your investment portfolio set up, you can take out the more affordable term life insurance, and invest the difference yourself.
Cheap Term Life Insurance: What to Be Aware of When Considering Low Cost Term Insurance
Term insurance is the cheapest form of life insurance and it can be taken out to give you a large amount of cover for certain periods in your life such as when your responsibilities are at their highest, and a lesser amount of cover as your responsibilities diminish. You can take term insurance out for periods of 10, 15, 20 or 30 years depending on your own specific needs. With each time period the amount of cover can be changed to what you feel is the most appropriate to suit your circumstances for that particular period.
The only thing you will have to remember is that there is an age limit on term insurance, usually 80 years, but you can overcome this by taking out of funeral cover to keep you protected in your final years. In the case of funeral cover, although premium payments cease at the age of 80 years, the cover continues and your family is protected from high funeral costs after you die.
Term insurance cover is cheapest when you are young as the risk of you dying is lower, the older you get the more likely it is that you are going to die while under the term insurance period, and this is reflected in the premium being charged. Where a large cover can be purchased for a very small premium early in life, the same cover can be out of reach financially, in later years. This is why you should not leave it too long before taking out adequate insurance to cover the different stages of your life. If you reach retirement age and your term insurance cover has expired, you will find it quite expensive to get funeral cover. Many older people find themselves paying $80 a month or more for term life insurance in the form of funeral insurance, for just $15,000 cover, whereas if the same policy had have been taken out in their younger days they would be paying out less than $15 a month.
How do I Compare Term Life Insurance Rates?
When comparing life insurance rates, it is important to get it right because a simple mistake can cost you a lot of money in premiums over the life of the policy. This is especially the case if the payout does not provide an adequate level of cover for your loved ones if you were to pass away unexpectedly. Therefore, to compare term life insurance rates efficiently, follow these few simple rules:
- Compare multiple policies, but do not rely solely on price: When assessing different term life policies and comparing the premiums rates for each cover, it is important to be fair in your judgement. The rates on offer should not be the only factor to consider when making your purchase decision. Some term life insurance policy rates may appear to be more affordable, however, they may only come with a basic level of built-in features and benefits.
- Check out the extras that are available: Another factor that will affect your term life insurance rates is your choice of additional features. Make sure that you assess and match your needs carefully with the additional options in place. The last thing you want is to be paying a higher premium for features you don't even need.
- Choice of premium structure - stepped or level premiums: Your term life insurance premium rates will vary depending on the premium structure that you have chosen. Stepped premiums are very affordable at the start of your policy, however, they will increase overtime as you get older. Level premiums stay at a specific rate and will not change regardless of your age.
- Lifestyle change: If you smoke or consume an above average amount of alcohol, consider dropping these habits for good, as it will reduce your term life insurance rates significantly.
- Review your term life cover every year: It is essential to review your cover regularly to ensure that it is still as relevant as when you first took out your policy. The cover you currently have might have been the right cover at the time you signed up for it, however, your situation may have changed and it may be considerably inadequate due to additional obligations.
Questions to Ask During Term Life Insurance Comparison
- What sacrifices can I make to afford insurance?
- Who is financially dependent on me?
- Is this a reputable provider?
- How much cover do I need?
- How long should I take out cover for?
- How much money do I need for retirement?
- What are the terms and conditions?
Types of Term Life Insurance
Before superannuation was universally adopted in Australia, for most employees it was commonplace for life insurance companies to sell whole of life insurance policies. These particular policies were made up of two distinct portions:
- Term insurance that covered the insured person for the life of the policy.
- An investment portion which could only be accessed if the insured person were to cash it in. When this occurred however, the policy became ineffective and the insured was left with no cover.
This form of life insurance made the major life insurance companies the great institutions that they are today. Whole of life insurance is no longer available in Australia with providers now offering term policies with no cash-value.
If premiums are paid and you die while the contract is still in force, the beneficiaries of the life insurance policy will receive the amount stated on the insurance policy. If that doesn't occur and the agreement expires, no insurance is payable.
Many life insurance companies have a system in place whereby the term insurance cover can be extended automatically when the initial cover expires. When this occurs it is normal for the premium to increase to the same amount that a new customer would have to pay, if they were taking out a new policy at that time, and was of the same age. This right of renewal is usually conditional and offered for a specific time depending on the type of policy being offered.
Term Life Insurance for Financial Planning
Term Life Cover can also be viewed as an effective mechanism for financial planning by ensuring that in the premature death of the main breadwinner, their loved ones will be able to continue to pursue the financial goals that they already had established.
Term Life Insurance: Frequently Asked Questions
You probably still have a lot of questions about term life insurance and how to choose the best policy and options for you, so make sure you have them all answered here before you apply:
- Should I take out instant issue term life insurance?
Instant issue term life insurance is type of policy which uses a simplified underwriting process which does not require you to undergo a medical exam. Cover is often guaranteed with an instant issue term life insurance policy, as you can apply online in just minutes and often aren’t asked any medical or lifestyle questions either. Just remember though that because the insurer knows very little about you, it can be hard to tailor a product directly to your needs, plus premiums will often be more expensive because the insurer doesn’t know what sort of risk they are taking on, and want to protect themselves for the worst.
- How do I know how much coverage to take out?
You should take out enough to cover all of your expected final expenses such as medical bills and burial costs, plus the living expenses for your dependents, such as loan repayments for the house and car, credit card repayments, future education costs for your children, plus any other ongoing expenses in your household.
It is important to look at your individual situation, rather than using a catchall formula of simply multiplying your annual income by 10 and choosing that as your cover amount. Remember that your needs and your family’s needs will change and develop in the future and you need to think about how that will be reflected in their living expenses.
- What term should I choose for my term life insurance?
Term life insurance is an ideal option to add extra coverage and peace of mind at times of high financial commitment. Therefore, think about when your mortgage will be at its greatest, your children’s needs will be the highest and your household income may be impacted because one parent is staying at home or working less to take care of the children. For example, if you have young children, you may want to choose a term which allows your insurance to cover your family until your children are out of tertiary education.
- What happens to my policy at the end of the term?
At the end of the term you have chosen for your cover you will have the option to renew your policy on an annual basis without being asked any medical or lifestyle questions, or undergoing a medical test. However, if you choose this option you may be paying higher premiums as the insurer cannot confirm your level of risk.
In other cases a term life insurance policy may have an option to roll over into a whole of life policy, which can then cover you until retirement or your death. Typically you will have a set period of time in which to convert your policy – dictated by each different insurer – and you won’t have to provide any new information about your health or lifestyle if you keep the benefits of the policy the same.
- Do the premiums of term life insurance go up each year?
The premiums will remain the same each year during the term you have chosen. This is known as a fully guaranteed, or level term policy and allows you to budget for your insurance each month.
- How do online insurance quotes compare to the actual costs of insurance?
Getting quotes online for your term life insurance is a good way to gauge the expected costs, however the final cost of your insurance premiums may differ based on what the insurer discovers in the underwriting process. As the insurer assesses your risk factors, your job, your lifestyle, your current health and your family’s medical history, they will calculate a premium based on how likely it is that you will die during the term you have chosen.
- How can I pay my insurance premiums?
Your insurer will generally give you the option to pay your premiums monthly, quarterly, six monthly or yearly. Make sure you check whether there is a loading added for paying your premiums in instalments throughout the year, or for the payment method you prefer – such as credit card or BPAY.
During the application process you can change and adjust the variables of your policy until you are happy with the final product. During the term of your insurance policy you may have the opportunity to change your coverage amount or your term of coverage at specific intervals during the term, often every two years.
- Are there any additional riders I should consider adding to my term life insurance?
There are a number of extra features you can add to your term life insurance policy to tailor it to your needs, and so you may want to consider the:
- Accidental death benefit rider. Will pay an additional amount above your coverage amount if your death is the result of an accident.
- Children’s term life insurance rider. Can pay a death benefit for each of your children covered under your policy in the event of their death. You can usually add insurance for your child for around $10,000 and $20,000, based on their age and other eligibility requirements.
- Waiver of premium rider. Will make sure your premiums are paid for you if you become totally disabled. There are often age and coverage restrictions which apply.
- Accelerated death benefit rider. Will make an advance payment of part of your benefit amount if you are diagnosed with a terminal illness.
Apply and Receive an Accurate Term Life Insurance Quote
Term life insurance can be a quick and easy way to protect your family at some of the most vulnerable and expensive times of your lives, so take the time to consider this added protection for your loved ones. There are hundreds of different policy options available in Australia from a range of different insurance providers so ensure you take the time to research each option carefully and assess what is best for you and your family. Each policy will have its own product disclosure statement that is usually available online. Taking the necessary time to read through the policy inclusions and exclusions will save any nasty surprises in the event that a claim is made.