Types of life insurance

When many Australians think of life insurance, they think of insurance that pays out when you die, however there are many other forms of life insurance that can provide assistance whilst you are living.

Under the life insurance banner there are a number of different covers.  These include income protection, trauma insurance and TPD insurance.  Each of these covers are separate, but work together to provide financial security for you and your family.

Term Life Insurance

The typical type of life insurance which pays out when you die is known as term life insurance.

Term life insurance pays out not only when you die, but also upon diagnosis of a terminal illness.  The definition of a terminal illness can differ slightly between insurers, but generally it will be when a doctor’s diagnosis gives you a life expectancy of less than twelve months.

A lump sum amount is paid out by term life insurance based on the amount you nominated when taking out the policy.  The funds can be used for any purpose, but are often used to repay mortgages and other debts, cover funeral expenses and provide an ongoing income or financial buffer for the surviving family and loved ones.

Income Protection Insurance

Income protection insurance, also known as disability insurance, is designed to cover you financially if you are unable to work for a period of time due to illness or injury.

The policy will pay you a monthly benefit based on your income.  This amount will generally be 75% of your pre-claim income, but can differ depending on the options chosen when taking out the policy.

An income protection policy will have a waiting period and a benefit period.  The waiting period relates to how long you must be unable to work for before benefits will commence, and the benefit period relates to how long the monthly benefits will continue for.  The maximum benefit period generally runs through to age 65, but can be longer in some circumstances.

TPD Insurance

Total and permanent disability (TPD) insurance works in a very similar way to term life insurance, but instead of paying out when you die it pays out if you suffer an event which leaves you totally and permanently disabled, and in a doctor’s opinion you are unlikely to ever return to work.

There are two definitions when it comes to TPD insurance, and these can have a major impact on your ability to make a successful claim.  A policy with an ‘own occupation’ definition will pay out if you are unable to perform your current occupation, whilst a policy with an ‘any occupation’ definition will only pay out if you cannot perform any suitable occupation.

The lump sum proceeds from a TPD insurance claim are often used to extinguish or reduce mortgages and debts, cover lost income and pay for expensive home and vehicle modifications that may be required as a result of your disablement.

Trauma Insurance

A trauma insurance policy will pay you a lump sum amount when you suffer a specified critical illness.

Also known as critical illness or recovery insurance, this type of policy will cover you for dozens of specified conditions, with the most common claims being for cancer, heart attack and stroke.

The concept for trauma insurance came from a South African doctor by the name of Dr Marius Barnard, who was involved in the world’s first heart transplant.  Dr Barnard realised that whilst he could save a person’s life, he could not save them from the financial devastation that often accompanied such an event.

The funds from a trauma insurance claim are often used to cover expensive medical bills and to access medical treatment that might otherwise not have been affordable.  The funds can also replace lost income and act as a financial buffer during a very stressful period.  Ultimately the trauma insurance funds will allow you to concentrate on your recovery instead of worrying about money.

Disclaimer

This article is about life insurance and is general information only. It should not however be treated as factual, as personal advice or be the basis of purchasing any insurance policy. Before deciding on an insurance policy read the PDS carefully and talk to a licensed insurance agent if you need further assistance. MoneyBuddy does not recommend insurance products or provide personal advice in regards to insurance products.

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