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How Does Life Insurance Work?

Life Insurance

Life cover revolves around a fundamental concept, yet not all life insurance policies are created equal. Here’s what you should know about the mechanics of life insurance, the coverage it provides, and the process for receiving benefits if the unexpected occurs.

What is Life Insurance?

Life insurance, also referred to as term life insurance or death cover, offers a lump sum payment to your chosen beneficiaries upon your death. This payout can help your loved ones cover various expenses, including mortgage payments, debts, childcare and school fees, and everyday living costs.

Some policies also provide terminal illness cover, which pays a lump sum if you are diagnosed with a terminal illness and have a limited life expectancy. Life cover can be purchased on its own or combined with other insurance types, such as total and permanent disability (TPD), trauma insurance, or income protection insurance.

What Does Life Insurance Cover?

Here’s a breakdown of what is typically covered by life insurance policies –

Death Benefits –

Life insurance provides a lump sum payment to your designated beneficiaries upon your death. This payout helps your loved ones manage various expenses, including –

Mortgage Payments – Covering outstanding balances to keep your home.
Debts – Paying off credit cards, personal loans, or car loans to avoid burdening your loved ones.
Childcare and School Fees – Assisting with costs related to childcare and education.
Everyday Living Expenses – Supporting ongoing costs like groceries and utilities.

Terminal Illness Benefits –

Many policies include terminal illness cover, offering a lump sum if you are diagnosed with a terminal illness and have a limited life expectancy. This payout can help with –

Medical Expenses – Covering treatment, medication, and palliative care costs.
Financial Support – Maintaining your family’s standard of living while you’re unable to work.

Accidental Death Benefits –

Some policies offer higher payouts in the event of accidental death, providing extra financial support for unexpected costs.

Additional Considerations –

Exclusions – Life insurance policies often have exclusions, such as suicide within a specific timeframe after the policy starts. It’s essential to review the Product Disclosure Statement (PDS) for details.
Policy Structure – Life cover can be standalone or linked with other insurance types, which may offer lower premiums but could reduce overall benefit payouts.

How Will Your Policy Be Structured?

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How Will Your Policy Be Structured?

Many superannuation funds in Australia automatically provide a basic level of life insurance to their members, and you may have the option to increase your coverage through your super fund. However, it’s important to note that with superannuation-linked policies, the trustee of the super fund is technically the policyholder. In the event of your death, the trustee receives the benefit from the insurer and then distributes it to your beneficiaries according to your instructions or your estate.

When considering life insurance, you should also evaluate your policy terms. Term life insurance is a popular choice that offers coverage for a specified period, often with options to renew until a certain age. If you outlive the policy term, the coverage expires unless you choose to renew it, which may come at a higher premium. Conversely, whole life insurance, although less common in Australia, provides permanent coverage for your entire life, ensuring continuous protection without the need for renewal.

As you apply for life insurance, the insurer will assess your individual risk through a process called underwriting, which considers factors such as your age, health, medical history, and lifestyle. This assessment will determine whether coverage is offered and what your premium payments will be.

Finally, it’s essential to remember that the structure and features of life insurance policies can vary significantly among insurers. To make an informed decision, compare options from different providers, read the Product Disclosure Statement (PDS) carefully, and consider seeking personalised advice from a financial advisor to determine the most suitable structure for your unique needs and circumstances.

Choose Morgan Insurance Brokers
Let Morgan Insurance Brokers take the stress out of finding the right life insurance policy for you. Our team of life insurance brokers will provide personalised guidance, whether you’re comparing term life and whole life insurance options or need help selecting a reputable provider.

We’ll navigate the intricacies of sourcing a policy tailored to your specific needs, ensuring you have the coverage you need to protect your family’s financial future.

With our deep understanding of the life insurance market, you can trust us to help you make informed decisions that offer you peace of mind and financial security.

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General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

All information above has been provided by the author.

Morgan Insurance Brokers, ABN 28 628 815 074, AFSL 327131

This article originally appeared on How Does Life Insurance Work? and has been published here with permission.