What is life insurance?
Answer
Insurance protecting dependents if insured dies
Explanation
Life insurance in Australia is the broad family of policies that pay benefits when the insured person dies, becomes totally and permanently disabled, suffers a critical illness, or is unable to work due to injury or illness. The four common types are term life insurance, total and permanent disability (TPD) cover, trauma or critical illness cover, and income protection insurance.
Term life insurance pays a lump sum to the policyholder's nominated beneficiaries (usually the family) if the insured person dies during the policy term. Sums insured typically range from a few hundred thousand dollars to several million, calibrated to replace lost income, pay off the home loan, and cover children's education. TPD cover pays a lump sum if the insured is permanently unable to work. Trauma cover pays a lump sum on diagnosis of specified serious illnesses such as cancer, stroke, or heart attack, regardless of work capacity.
Income protection insurance pays a regular income (typically up to 70 per cent of pre-disability earnings) if the insured cannot work because of illness or injury. Benefits can run for two years, five years, or to age 65, depending on the policy chosen. Premiums for income protection are generally tax-deductible, while life and TPD premiums outside super are not.
Many Australians hold life and TPD insurance automatically through their superannuation, with default cover provided by most funds. Cover through super is usually cheaper because of group rates, has tax advantages, and does not require medical underwriting up to default amounts. The Protecting Your Super Package reforms of 2019 stopped automatic insurance for inactive accounts and accounts of members under 25, addressing previous problems of unwanted policies eroding small balances. Members can opt in to insurance, or opt out, by contacting their fund. Underinsurance remains a significant issue: the Council of Australian Life Insurers estimates that the average working Australian holds about half the life cover they would need to maintain their family's lifestyle if they died.
Why this matters for your test
Life insurance protects families from the financial impact of death, disability, or long-term illness, and recognising default super cover plus the four main policy types helps new citizens assess their needs.
Source: Australian Citizenship: Our Common Bond (2024)
