Is Life Insurance Worth It In Australia?

Life insurance is an umbrella term for a group of insurance policies that pay out if you pass away or are unable to work due to illness or injury. The money is paid out to the people you nominate as beneficiaries on the policy—usually a spouse or any dependents who rely on you financially.

A financial safety net for family is the number one reason that people decide to get life insurance, according to the Council of Australian Life Insurers (CALI). A survey of more than 5,000 Australian workers conducted for CALI’s 2024 The State of Australia’s Safety Net report found that 45% chose to get life insurance to provide protection and a sense of security for their loved ones.

There are four main types of life insurance in Australia that offer coverage for different events:

1. Life Insurance

Also known as death cover or term life cover, life insurance pays out a lump sum to your beneficiaries if you die or are diagnosed with a terminal illness.

2. Total and Permanent Disability (TPD) Insurance

TPD insurance pays out a lump sum if an illness or injury renders you totally and permanently disabled and unable to work. The money is there to help with any medical and rehabilitation costs as well as household and living expenses.

3. Income Protection Insurance

Pays part of your income if you can’t work due to a total or partial disability caused by illness or injury. Payments are ongoing and designed to replace a monthly income or salary. You’re insured for up to 90% of your pre-tax income for the first six months and up to 70% of your pre-tax income for a specified time thereafter.

4. Trauma Insurance

Also known as critical illness or recovery insurance, this type of policy pays out a lump sum if you are diagnosed with a critical illness or suffer a serious injury. It’s designed to help cover medical costs and household expenses, and unlike income protection insurance, is paid out regardless of whether you can continue to work.

If you have a family who depends on your income, life insurance will help them cover the mortgage and other household expenses if you pass away. If you don’t have any dependents, you may want to consider getting income protection, TPD or trauma insurance to help support yourself if you get sick or injured.

It’s important to review any life insurance policy regularly to make sure you’re not underinsured or paying for cover that you don’t need. Major life milestones that impact your financial situation are a good time to reassess your life insurance needs. For example, buying a house or having a baby can be triggers to increase your life insurance, while retirement could be a good time to think about dialling back your cover.

Most Australians have automatic life insurance coverage through their superannuation, and some super funds provide income protection and TPD insurance, too. If you are considering taking out life insurance, check what you’re already covered for so you’re not paying for the same thing twice.

Life insurance through super is usually more basic than the coverage offered by specialist life insurers and policies aren’t tailored to your personal circumstances, so the premiums tend to be lower. You’ll pay these out of your super balance, which is taxed at 15% so it can be a tax-effective way to buy insurance (although it will eat into your retirement savings).

Most life insurance policies through super will only cover you until age 70, while TPD through super is usually up until the age of 65. Outside of super, life insurers will generally set an entry age limit (the maximum age you can be to apply for a new policy) and an expiry age for when the policy’s coverage will end. For example, if the entry age is 75 and the expiry age is 99, you won’t be accepted if you’re 76 or older and you’ll no longer be covered once you turn 100.

If you are looking to purchase life insurance outside of super, you can buy a policy directly through a life insurer or through an insurance broker or a financial advisor. Life insurers are only allowed to offer general advice, while brokers and financial advisors can assess your financial situation, recommend suitable policies and explain the advantages and disadvantages of each one. As with any insurance, it’s important to do your own research and read the policy’s Product Disclosure Statement to decide whether it’s right for you.

Buying life insurance through a broker or financial advisor can be useful if you’re not sure what type of policy is right for your circumstances or how much coverage you need, but there are fees involved. Council of Australian Life Insurers (CALI) CEO, Christine Cupitt, says we need to improve access to advice around life insurance.

“Financial advisors do an incredible job of helping Australians with personalised and holistic financial plans,” she says. “Unfortunately, there aren’t enough of them to meet demand with just 1,000 nationally who regularly help people navigate life insurance products.

“It highlights the critical need for financial advice reforms to allow life insurers to provide simple advice on their own products to customers when they ask them to and at no extra cost to them. People need someone to talk to.”

Related: Life Insurance Outside of Super

In 2023, life insurers paid out $12.2 billion in financial, rehabilitation and return-to-work support to 91,658 Australians and their loved ones, according to CALI’s State of Australia’s Safety Net report. The Australian Prudential Regulation Authority’s quarterly reporting shows that 97% of life insurance claims and 95% of income protection claims were approved in the 12 months to April 2024.

The major advantage of life insurance is that it can give you peace of mind your loved ones will be taken care of if you’re no longer around or able to do so. But this financial safety net does come with a price tag—premiums that will likely increase as you age.

When you purchase a life insurance policy outside of super, the insurer will ask a series of questions that will determine how the amount you’ll pay in premiums. Questions may relate to:

• Age: Younger people will pay lower premiums because they have a greater life expectancy and are likely to be able to pay premiums for longer
• Gender: Men have higher mortality rates than women, so life insurance is generally more expensive
• Occupation: If your occupation puts you at a higher risk of accidents or illness, your insurer may charge you a higher premium
• Medical history: A family history of certain illnesses such as cancer or heart disease may mean you’ll pay more for coverage, as will chronic medical conditions such as diabetes
• Lifestyle: General health indicators such as high blood pressure can affect how much you’ll pay, as will smoking or excessive drinking.
• Coverage amount: The higher the coverage amount, the more your insurer will need to pay out if there’s a claim so they’ll charge you a higher premium

Cupitt says insurers need to know this information so they can assess the right level of cover for each individual and manage risk and equity across their customers to ensure a sustainable business model.

“[Life insurers] want to insure people, and they want to do so with a meaningful level of cover,” she says. “Declining to offer cover is rare and only ever a last resort.”

The Moneysmart website has a life insurance needs calculator to help you work out roughly how much life insurance you’ll need.

If you don’t have life insurance and you pass away, your family will be financially responsible for any debts you carry.

These may include a mortgage, car loan and credit card bills or personal loans.

They will also need to cover household expenses such as utility bills and groceries and any costs associated with your death, including end-of-life care and funeral expenses. According to Moneysmart, funerals can cost anywhere from $4,000 for a basic cremation to $15,000 for a more elaborate burial.

There are additional types of policies under the life insurance umbrella that have been designed to cover specific expenses.

• Funeral insurance: provides a lump sum payment to help with the immediate costs of a funeral. Most policies will only cover accidental death for the first few years and premiums can increase significantly over time.
• Mortgage protection insurance: covers your home loan repayments if you pass away, lose your job, or can’t work due to illness or injury. This ensures you or your beneficiaries can keep your home, but it only covers mortgage repayments, not medical costs or any household bills.

Other alternatives to life insurance include:

• Prepaid funeral plans: lets you choose and pay for your funeral in advance either in full or through instalments. Costs are calculated based on today’s prices and aren’t subject to inflation so it can be cheaper than funeral insurance.
• Savings: some people prefer to set aside money in a savings account as a financial safety net for their family. You don’t have to commit to paying regular premiums, but it can take a while to build up enough of a nest egg.
• Private health insurance: can help cover some of the out-of-pocket expenses related to medical treatments if you suffer an illness or injury.

If you have a spouse or dependents who rely on your income, life insurance will ensure they are looked after if you’re no longer able to. Single people may also see the benefit in income protection or TPD insurance that would help to support them if they became ill or injured and could no longer work.

On the other hand, if you’re older and in poor health, your life insurance will be significantly more expensive, and you may decide the premiums aren’t worth it. Likewise, if your family are financially independent or you have assets or investments that could cover the mortgage and bills, you may decide that life insurance isn’t for you.