When we look closely at the subject of life insurance in Australia, there are some obvious features and benefits most people are already aware of. However, there are features of any policy and factors affecting its composition/cost that some people may not be aware of.
Do I need life insurance in Australia or just income protection insurance?
While there are certainly similarities between these two kinds of insurance policies, there are also some fundamental differences. Income protection insurance provides you with a monthly payout (generally no more than 70% of your basic income) if you find yourself unable to work because of an injury or illness.
This financial aid is intended to keep working people afloat when unfortunate circumstances strike but also aid the policyholder and not just their beneficiaries.
Life insurance in Australia, on the other hand, is primarily aimed at providing financial assistance to families or beneficiaries who are left behind when the policyholder is deceased or diagnosed with a terminal illness.
Both policies are exceptionally good at supporting families in difficult situations and providing peace of mind during the good times, knowing those protections are in place.
Whether one or the other, or even both are required is a matter for each individual to ascertain for themselves.
Are there any exclusions to prevent me from taking out life insurance in Australia?
There are some basic eligibility criteria for life insurance policies, including:
- Age – Applicants must be aged between 18 and 73 to take out a policy
- Citizenship/residency – Only Australian citizens or permanent residents are eligible to take out life insurance in Australia. That means that people visiting Australia are not covered.
There are also some exclusions, including:
- Pre-existing medical conditions – If you have a serious pre-existing condition a medical check may be required and your chosen insurer may exclude you from coverage based on the recommendations of the medical team.
- Occupational hazards – Individuals participating in the most dangerous types of employment may find it difficult to obtain life insurance in Australia.
And some reasons why a claim may be denied:
- Self-inflicted injuries – If the reason the policyholder is deceased is due to a self-inflicted injury, insurance companies will declare the policy null and void.
- Misrepresentation – Failure to fully and accurately disclose any information at the time the policy is taken out, or to update the insurers in any change of circumstances might give them grounds to deny a claim.
What if I already have life insurance in Australia through my superannuation?
While it is true that some superannuation policies also contain life insurance caveats, you should not assume this to be the case without checking first. If your super does have a life insurance contingency, it is important to make sure any terms and conditions are comparable with those of a dedicated policy for life insurance in Australia.
This also applies to any payouts your beneficiaries can expect to receive in the unfortunate case of your demise, so make sure they are comparable and will provide for your loved ones to an appropriate level.
Please note: If you do not contribute to your superannuation for an extended period (usually 16 months), you may find any life insurance in Australia is summarily terminated.
What are the advantages and disadvantages of life insurance in Australia through my superannuation?
An estimated ten million individuals have life insurance in Australia through their super fund but very few are aware of the exact nature of their policy and any advantages or disadvantages it might have over retail life insurance. Is it safe to rely solely on life insurance in Australia through a super fund?
- Automatic acceptance — All individuals will be accepted and granted coverage without health checks.
- Convenience — Insurance premiums will be automatically deducted from your balance.
- Tax — Life insurance and TPD insurance payouts are tax-free in certain circumstances.
- Premiums — Life insurance in Australia through your super is unlikely to be as competitively priced as retail insurance.
- Inadequate coverage — Default cover from super funds is usually inadequate for most people. It is possible to apply for increases but those may be limited.
- Coverage may decrease as you grow older — If the default insurance from super funds is provided in units, the number of these may decrease as you age, meaning cover will automatically reduce at the time when the risk of needing it is highest. Retail life insurance in Australia does not function this way and will only be reduced at your request. Most superannuation life insurance also expires earlier, usually between the ages of 65 and 70.
- Non-guaranteed renewal — Unlike a retail policy, the terms and conditions of superannuation policies are agreed between the trustee and insurer and must be renegotiated periodically (typically every 24 months). Renewal is not guaranteed.
- Choice of beneficiaries — This is limited to the policyholder’s financial dependants or estate, whereas retail policies allow them to nominate any person, business or company they wish.
- Payouts — These can be much slower as the trustees must determine if a condition of release has been met. The trustees also have ultimate discretion on who receives the payout and need not honour your wishes regarding beneficiaries if they so choose.
- Tax — Although also listed as an advantage above, the amount of tax payable on any claims depends on the beneficiary. If they are not a direct tax dependant of the policy-holder, they may find themselves liable to pay almost a third of the full amount as tax.
- Additional benefits — Superannuation policies are restricted in what extra benefits they can offer by bespoke legislation. Retail policies may include several additional benefits, including funds in advance to cover funeral costs, financial planning cost reimbursement, counselling sessions for the bereaved, trauma cover for children, and paid accommodation costs for any family members forced to travel and stay away from home when the policyholder is diagnosed as terminally ill. Superannuation policies offer none of these.
- Exclusions — Although cover is provided automatically, without a health check, superannuation life insurance in Australia will often exclude claims based on pre-existing health conditions for as long as the first 5 years of the policy. Whereas retail policies would be compelled to disclose this, superannuation policies are less transparent and you may not realise your cover is not valid.
- Contributions — Many superannuation funds have rules stating that if you stop contributing or your balance falls below a set level, your life insurance in Australia will cease to provide cover.