The 4 types of life insurance: what they are and when you need them

Life cover

Life cover helps you and your loved ones financially in the event of your death or a terminal illness diagnosis. This is important if you have other people who depend on you – especially if you have a mortgage or other debts.

How much cover do you need?

The Australian Securities and Investments Commission (ASIC) has developed a life insurance calculator that can help you work out the right level of cover for you and your family. But an even better way to come up with an accurate amount is to talk to your financial adviser. They’ll work with you to understand your current situation and goals for the future, ensuring your cover is right for your needs.

How is your policy paid out?

When a life cover benefit is paid, it generally goes to the owner of the policy or a nominated beneficiary, like your spouse or children.

How is your policy structured?

You can purchase life cover on its own or you can ‘link’ other cover to it on the same policy. The latter means that it’s connected to either total and permanent disability (TPD) cover or trauma cover.

Linking cover generally reduces your premiums, but there can be implications at claim time. This is because if you’re paid out for one linked cover like TPD, it will reduce the benefit you’ll receive from your life cover by the equivalent amount. You may, however, be eligible to buy back this life cover at some point in the future.

Total and permanent disability (TPD) cover

Becoming unexpectedly disabled is not only a huge mental shock – it can be financially challenging as well. You’ll need to consider the costs of medical care and perhaps modifications to your home. You could also have a significant earnings gap over your working lifetime. That’s why total and permanent disability (TPD) cover can be so valuable.

What happens when you make a claim?

When you take out a TPD policy, you’ll usually get the option to choose a definition that will apply at claim time: own occupation or any occupation.

Own occupation’ means your insurer assesses your claim based on your ability to perform the specific requirements of the job you currently do. It is normally selected by people with very specialised occupations. The more common definition is ‘any occupation’, where your claim will be assessed against your ability to perform any job you are qualified or suited to, based on your education, training or experience.

It’s worth noting that TPD claims can take longer to pay out than other types of life insurance. That’s because of the complexities involved with determining whether a disability is permanent.

How is your policy structured? 

You can purchase TPD cover on its own or as a ‘linked’ cover that’s connected to life cover or trauma cover, or both.

Income protection cover

Income protection helps you safeguard one of your biggest assets – your ability to earn an income. It helps support you if you become injured or ill and are unable to work, with a regular benefit in place of the salary you’d normally be earning.

How much cover do you need?

When you apply for income protection, you can choose a sum insured worth up to 70% of your before-tax income (excluding super contributions). We recommend speaking to your financial adviser to work out exactly how much you’ll need to maintain your lifestyle and cover any debts or bills.

How is your policy paid out?

With income protection, you have a waiting period and a benefit period that determine when and for how long your policy will pay benefits.

The waiting period is the amount of time you’ll need to wait after consulting a doctor about an injury or illness before getting your first benefit payment. You can choose from 30 days, 60 days, 90 days, 1 year or 2 years, depending on your emergency savings and any other cover held, for example in your superannuation fund. You might want to factor in any annual or sick leave from your employer when making your decision about the waiting period.

The benefit period is how long you’ll receive regular payments for while you’re eligible to claim. This might be based on a length of time (for example, two years) or an age (for example, until you are 65). Whatever you choose will affect your premium payments, so it’s a good idea to consult your financial adviser.

Trauma cover

Trauma cover is designed to support you while you recover from a serious medical condition, helping you pay for treatment, make any lifestyle changes, and take care of everyday expenses.

What are you covered for?

Generally speaking, trauma cover includes serious illnesses that are likely to require expensive medical treatment, have a significant recovery period, or force you to make major lifestyle changes. This may include serious conditions such as a heart attack and stroke. You should read the relevant Product Disclosure Statement to see a list of everything you’re covered for.

How is your policy structured?

You can purchase trauma cover on its own or as a ‘linked’ cover connected to life cover or total and permanent disability cover, or both.

How many times can you make a claim?

A little-known benefit of trauma cover is that you may be able to make multiple claims in your lifetime. That’s because there’s an option to reinstate your policy, usually after 12 months of claiming. Just remember, it’s unlikely you’ll be able to claim for the same or related condition twice. There are also partial benefits which pay a lower amount for a shorter list of less-severe conditions. To find out if trauma cover is right for you, speak to your financial adviser.