What does life insurance cover?

Key Takeaways

• Life insurance usually covers death and often terminal illness
• A payout may help with mortgage repayments, debts, living expenses, education costs, funeral expenses or whatever is needed
• What is covered can vary between insurers, policies and optional benefits
• Some policies may let you add extra cover
• Claims are usually paid when a covered event happens and the insurer accepts the claim

Many people start thinking about life insurance after a major life event, such as having a child, taking on a mortgage or wanting more certainty about their family’s financial future. It is often about helping provide financial support for the people who matter most.

Life insurance generally provides a lump sum payment if the insured person passes away, and some policies may also include a serious illness benefit. Depending on the policy and claim outcome, this payment may help loved ones manage costs such as mortgage repayments, debts, everyday bills, funeral costs or other expenses the beneficiaries need to cover.

What life insurance typically covers

At its core, life insurance is designed to provide financial support if you pass away or are diagnosed with a terminal illness.  What is included will depend on the insurer, the product and the policy terms.

Eligibility criteria and terms and conditions can vary, it is important to check the Product Disclosure Statement (PDS) and policy wording to understand exactly what is covered and when a benefit may be paid.

Learn more: Why you could consider life insurance

Death

Providing financial support to your loved ones if you pass away  is the main purpose of life insurance.

If the insured person passes away while the policy is in force, the policy may pay a lump sum cash benefit, subject to the policy terms and claim being accepted.

Who receives the benefit will depend on how the policy is set up and the relevant policy terms. That is why it is worth understanding ownership, beneficiary nominations and any estate-related considerations before taking out cover.

Terminal illness

Some life insurance policies also include a terminal illness benefit.

If the insured person is diagnosed with a terminal illness that meets the policy definition, an eligible benefit may be paid early, subject to the claim being accepted. This may give the insured person and their family more financial peace of mind at a difficult time.

The exact criteria will vary between policies. For example, the definition of terminal illness, the medical evidence required and any life expectancy threshold are set out in the policy terms.

What life insurance usually does not cover

Life insurance can provide valuable financial support, but it does not automatically cover every situation. Understanding common exclusions can help you read your policy with more confidence and know what questions to ask before you rely on your cover.

Common exclusions may include:

Suicide and self-inflicted injury

Many life insurance policies include a suicide exclusion period at the start of the policy. This means that if death occurs as a result of suicide or self-inflicted injury during that period, a benefit may not be paid.

The purpose of this exclusion is to set clear rules around when cover begins for certain events. The length of the exclusion period and the exact wording will depend on the policy.

Non-disclosure or incorrect information

When applying for life insurance, you are usually asked questions about your health, medical history, lifestyle, work and smoking status. It is important to answer these questions accurately and honestly.

Insurers use this information to assess the risk they are being asked to cover. If relevant information is left out, or the answers given are inaccurate, it may affect the cover provided or the outcome of a future claim.

Illegal activity or high-risk behaviour

Some life insurance policies may not pay a benefit if death occurs while the insured person is participating in illegal activity or certain excluded high-risk behaviour.

The types of activities that are excluded will vary between policies, so it is important to understand whether any specific conditions apply to your cover.

Learn more: 8 of the most-googled life insurance questions – answered

Policy exclusions and waiting periods

Some policies include waiting periods or other exclusions that affect when cover starts or when a benefit may be paid. These conditions can apply to the policy as a whole or to specific benefits.

Because terms and conditions vary between insurers and products, it is important to understand how a policy works before taking out cover. Looking closely at the policy wording can help you understand what is included, what is excluded, and when cover applies.

Optional cover that may be available with life insurance

For some people, life insurance cover for death and terminal illness may feel like enough. For others, it may make sense to add cover for events that can also have a major financial impact, such as a serious illness.

Depending on the insurer and product, some policies may offer optional cover. These options can broaden what the policy responds to, but they will usually increase the cost of cover.

Serious illness insurance

Serious illness insurance pays a lump sum if you are diagnosed with a specified serious illness or injury covered by the policy.

This type of optional cover may provide a lump sum if you are diagnosed with a condition covered by the policy, subject to the policy terms and claim being accepted. The payment may help with medical expenses, rehabilitation, time away from work or everyday living costs.

For example, if someone has a heart attack (with evidence of severe permanent heart muscle damage), and needs time away from work while they recover, serious illness insurance may help ease the pressure of ongoing bills and other costs during that period.

Since covered conditions and definitions vary, it is important to check the policy documents carefully to understand what is included and what limits or exclusions apply.

Children’s insurance

Some policies also offer children’s insurance as an optional benefit.

This type of cover is generally designed to provide a lump sum payment if a covered event affects an insured child, subject to the policy terms. Depending on the product, the payment may help families manage unexpected costs during a difficult time.

Because children’s cover varies widely between insurers and products, it is important to check eligibility rules, covered events, exclusions and benefit limits before relying on it.

For example, if a child experiences a serious covered medical event, this type of cover may give a family more financial flexibility while they focus on care and recovery.

What can a life insurance payout be used for?

A life insurance payout can help give your family financial support at a difficult time. While it cannot take away the emotional impact of losing someone, it may help reduce immediate and future money pressures of your loved ones.

Depending on their needs, a payout may be used for things like:

• reducing or paying off a mortgage
• covering rent, bills and groceries
• repaying loans or credit card debt
• paying for children’s education
• covering funeral expenses
• creating a financial buffer during a difficult transition

Learn more: What is underinsurance and why it matters in Australia

When does life insurance pay out?

Life insurance generally pays out when a covered event happens, and the insurer accepts the claim. In most cases, that means the insured person has passed away or been diagnosed with a terminal illness.

To assess the claim, the insurer will usually ask for supporting documents. For a death claim, this may include a claim form, proof of identity and a death certificate. For a terminal illness claim, medical evidence is usually required.

The insurer will then assess the claim against the policy terms, including any exclusions or conditions. If the claim is accepted, the benefit is paid to the policy owner, nominated beneficiaries or the estate, depending on how the policy is set up.

Ready to weigh your options?

Life insurance can help provide financial support if life changes suddenly. Learn more about Real Life Insurance or request a quote now. 

Frequently Asked Questions

Does life insurance cover natural death?

Life insurance may cover natural death if the policy is active and no exclusions apply.

Does life insurance cover accidental death?

Life insurance may cover accidental death because it covers death more broadly, subject to the policy terms. Accidental death insurance is different because it only covers death caused by an accident.

Does life insurance cover funeral expenses?

A life insurance payout is usually paid as a lump sum rather than as a separate funeral benefit, but it can often be used by beneficiaries or the estate to help cover funeral expenses.

Does life insurance cover cancer?

Life insurance may cover cancer in different ways. If cancer leads to death, a death benefit may be payable. If it meets the policy definition of terminal illness, a terminal illness benefit may also apply. Optional serious illness insurance may respond to specified cancer diagnoses, depending on the policy.

What is the difference between life insurance and term life insurance?

 A life insurance policy designed to cover you for your entire life, as long as you keep paying premiums. It doesn’t have a fixed end date. Whereas a fixed‑term life insurance policy covers you for a set period only.