How does life insurance work?

Imagine what life would be like if the unexpected happened and the breadwinners in your family were unable to work? Whether it’s an accident, death, ill health or some other unforeseen occurrence, the loss of one or two income sources could lead to extreme financial difficulty, uncertainty, and significant challenges for the rest of your household.

Life insurance can offer protection for your family in these challenging times, but how does life insurance actually work? In this article, we take out the mystery and look at some of the details you need to know about life insurance.

What is life insurance?

Life insurance encompasses a range of cover types. Depending on your circumstances, you may want to have one or a combination of life insurance policies:

  • Life cover – Life cover is also known as term life insurance or death cover. This type of coverage pays out a specified lump sum upon death. The money is paid to beneficiaries nominated on the policy.
  • Total and permanent disability – Total and permanent disability cover often comes in a bundle with life cover. This type of cover pays out a lump sum to help with living expenses and rehabilitation if you’re totally and permanently disabled.
  • Trauma – Trauma cover is also known as critical illness cover. It pays you a given amount if you develop certain types of illnesses or conditions. Generally, the types of conditions covered are major ones that affect your life significantly such as malignant cancer or a heart attack of a significant severity.
  • Income protection – Income protection insurance protects you and your family if you’re unable to work due to injury or illness. It replaces a part of your usual income.

What are the benefits of life insurance?

We’d all prefer not to think about the unexpected events in life, but having risk-mitigation strategies is vital – especially if you have dependents. Some of the benefits of life insurance include the following:

  • Preserve living standards – Life insurance can allow you to maintain your living standards even if you’re ill or injured, or if your household loses a main breadwinner.
  • Cover costs of care – If you’re ill or injured, the right type of life insurance can cover the costs of care and rehabilitation, which can be significant.
  • Provide for your family – Life insurance can give you peace of mind that your family will be provided for if the unthinkable happens. For example, you might be able to ensure your children’s childcare and education costs are covered, and your family will be able to live comfortably.
  • Meet ongoing financial obligations – Life insurance can allow you to meet your ongoing financial obligations, such as your mortgage and other loans, if you’re sick or injured and can’t work.

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What’s involved with getting life insurance?

It’s easy to finalise your life insurance policy over the internet or on the phone. Explore the types of cover available and pick the one(s) you think are right for your situation. You can compare the different types of life insurance cover before deciding.

Once you have a good idea about the policy or combination of policies right for you, request an online quote. Your quote will give you a definitive idea about what you’ll be paying in premiums. Check out the relevant product disclosure statements for more information.

If you have any further questions, you can always contact the insurer directly or request a call back before finalising your insurance policy.

Who needs life insurance?

Life insurance can be a valuable option for anyone from singles to families. If you have dependents, you’ll likely want to secure their future and minimise potential financial hardship from unexpected events. If you’re single, options such as total & permanent disability and income protection can be valuable to ensuring you remain independent if you are unable to work. In short, life insurance is relevant to everyone, as you never know what unexpected events may occur.

Deciding how much life insurance you’ll need

No hard and fast rule applies for how much life insurance you’ll need. Consider key factors like your debt obligations, monthly household spending, and number of dependents. Use this simple life insurance calculator to work out what you’ll need.

  • Young adults – A young adult, whether single or in a relationship, can benefit from having living benefits like total and permanent disability and income protection to ensure financial independence in the event of an injury or illness.
  • New parents – If you’re a new parent, you’ll have changing financial obligations. A combination of term life cover and other living benefits policies can help you make sure your child is taken care of, no matter what happens.
  • Middle-aged parents – If you have older children, you can use term life cover to ensure their education and start in life is assured no matter what.
  • Middle-aged empty nesters – Seniors approaching retirement might consider life insurance as a means of asset preserving so that a surviving spouse can afford to maintain their existing lifestyle.

Australians are underinsured

Research suggests Aussies tend to be underinsured when it comes to life insurance. While $680,000 of term life cover is the amount needed to cover the typical middle-income Australian family with two children, the median level of life insurance is around $258,000.

According to Lifewise, an initiative of the Financial Services Council, Australia is one of the most underinsured populations in the developed world, and we rank 16th for life insurance density and penetration. In fact, only 4% of the population with dependent children have suitable levels of life insurance.

This is a major problem, because the leading cause of ill health and death in Australia is chronic disease. Over 11 million Australians had been diagnosed with at least one of eight chronic diseases (across all age groups), and approx. 25 per cent of the population had two or more chronic diseases in 2014–2015.

When should you review your life insurance policy?

Major “trigger” events can be opportune times to review your life insurance or to buy if you don’t have it. Buying a new house, whereby you’re committing to a mortgage, can be a good milestone to check you’re adequately covered through life insurance. If you’re a new parent or adding another member to the family, your financial situation will change, and so it’s also a great time to review your life insurance policy to ensure your dependents will be covered.

Other trigger events include getting married, getting a raise at work, buying an investment property, and any other events that affect your financial circumstances and responsibilities.

Life insurance can protect you and your family in case of unexpected serious illness or death. Most Australians with dependents don’t have adequate life insurance to protect them against unforeseen situations. It’s vital to review whether you have adequate life insurance particularly during major milestones such as getting married and buying a new house.

Real Insurance offers award-winning, affordable life insurance for singles and families. Find out more on our website or apply for a quote online today.