You have three options when it comes to purchasing cover.
If you are ready to take out life insurance or income protection, you generally have three options to compare policies and apply for cover: Buy life insurance.
With an adviser. Make an inquiry with an insurance consultant who can discuss the options available.
Without an adviser. Compare products available from different insurance brands and purchase cover direct without the help of a consultant
Through super. Alternatively, you can check your superfund as they may provide some level of cover.
This article will discuss the process of purchasing life insurance and offer guidance on steps you can take to find suitable cover at the right price.
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Types of policies to consider
There are four main types of life insurance offered by insurance groups in Australia:
Term Life Cover: Provides a lump sum payment in the event of your death or if you are diagnosed with terminal illness with less than 12 months to live.
Income Protection: Provides monthly benefit payments if the insured person becomes unable to work due to illness or injury. The payment is a supplement income of up to 75% of the normal income that the insured person receives.
Trauma Insurance: Provides a lump sum payment if the person insured suffers from specific trauma illness or injury as defined within the insurance policy.
TPD Insurance: Provides a lump sum payment if the insured person is totally and permanently disabled.
How much cover do I need?
To ensure that you buy the right level of life insurance for you and your family, start by looking at your situation and what you would need to cover if you were to pass away.
How much money will your family need if you weren’t there to support them with a steady flow of income? What debts and expenses will need to be paid off? The level of cover you take out should be able to allow your family to continue their current lifestyle, without having to worry about financial obligations and making ends meet.
Here is a checklist of the factors you may need to consider:
The number of dependents and their ages. What sort of costs do they bring to your household? Consider expenses such as childcare, education, food, clothing and entertainment costs.
The value of outstanding debt. Does your family still have a home loan that has not been paid off? How about car loans, credit card debts, travel loans or other personal loans that have yet to be repaid? You do not want to leave your family with the responsibility of these debts.
Value of regular expenses. You need to ensure that your family can keep up with regular expenses such as council fees, utilities, health insurance, car insurance, fuel and other regular bills.
Final expenses. In the unfortunate event of your death, your family may be faced off with final expenses such as funeral costs, legal costs or medical and hospital expenses. These costs should be factored into the final coverage amount.
Levels of income. You will no longer be able to provide an income for your household, but what about your spouse? Will your spouse experience a reduced level of income as a result of your death? Perhaps your spouse will now need to pick up your children or do the cooking and cleaning, resulting in less time spent working. This will need to be accounted for in calculation of the amount of coverage necessary.
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Steps to determine the amount of life insurance you will need
Once you reflect and consider the expenses and financial obligations your family will face in the event of your death, there are a few further steps you should take before you compare life insurance providers and take out a life insurance policy.
If you add up each of the expenses that you think your family will be burdened with in the event of your death, disability or injury, then you should arrive at a benefit amount. This should account for current and future costs such as mortgage, rent, personal debt, education and everyday living expenses.
You should also make sure you adjust this amount for the rise in the cost of living, as costs today may be different from costs in the future. Most policies will automatically increase the level of cover each year to keep pace with inflation.
Find out whether your beneficiaries will have to pay estate taxes and whether this cost will need to be included in the life insurance benefit. Taxes could significantly decrease the amount of money received by your family, and hence they might not have enough to cover all the expenses.
Think about whether there will be any assets that your family will sell in the event of your death, and whether this can decrease the level of cover that you take out. This may include cars or investment properties.
Which life insurance provider should I choose?
There are many life insurance providers available for your consideration when you are looking to take out life insurance, and it is important that you do consider and compare life insurance providers to ensure that you get a suitable and affordable policy for you. There are many factors you should consider when choosing a life insurance provider, as you want to be able to trust your provider to be able to give the appropriate support in the event that a claim is made.
The major elements you should be looking for are the following:
Policies on offer: Does the life insurance provider have a diverse range of policies to choose from? More importantly, does the insurance provider have the policy that will suit your needs? You should also consider whether or not the provider will be able to provide for you if your circumstances change, and whether they have a policy that will suit your new needs.
Flexibility in cover: Are the policies on offer flexible and provide a range of different options that you can choose from? You want to make sure you have chosen all the options you need to ensure you and your family have the best coverage and financial protection if you pass away.
Reputation in Market: It is essential to research the insurance provider carefully and ensure that they are a recognised financial institution with a listed address. Research the company history, the company profile, number or value of claims processed in the past and customer reviews.
Financial Strength: Find out if the insurance company can back up its reputation with a record of financial strength. You want to be sure that the company will be financially stable for many years to come so that they will be able to pay your claims when you need them. One method of checking this is to look at their financial strength score through rating agencies.
Customer Service: Excellent service to its customers should be shown by the company in all phases, from initial application phase to claims processing. Make sure that you find a company with a team of professional insurance advisers on hand to answer all of your questions from day one. It will also be of utmost importance you are provided excellent customer service during times of stress and anxiety.
Claims Process: Find an insurer that takes the best line of action in the event that you need to make a claim. Is the claims process simple, efficient and easily accessible? Read customer reviews and look out for complaints from previous customers on the insurer’s processes in providing coverage.
Cost of coverage: Cheap insurance may not always be the best idea, as they could be omitting important elements of your coverage. Compare policies based on your age, the policy structure and the amount of coverage you are buying.
Understanding life insurance premiums
When you purchase life insurance coverage you will need to pay a periodic fee, which is known as a premium. There are many factors that go into setting the price of a premium, calculated by specialists in a life insurance company using many statistical formulas and historic data. Generally, the premium represents the policy chosen and risk that the insured presents to the provider.
Your age: The younger you are, the lower your premiums will be as you are less likely to pass away when you are younger. Your premiums may increase with age.
Gender: Your gender can impact how much you will pay at different points of your life. This is based on statistical data showing life stages that men and women are more likely to suffer serious illness.
The Chosen Policy: The policy you choose will have an affect on the level of premium you pay. The largest factor will be the amount of coverage you seek to be insured for. Other factors include the optional extras that you take out along with the insurance policy.
Smoking and drinking: Smokers can pay as much as double in premiums to non-smokers. Insurers will also look into the applicants alcohol consumption.
Current health: during the application process you will usually be asked to undertake a medical exam, which looks for things like high blood pressure and other health concerns that may present a higher risk to the insurer.
Health History: Insurance providers will look at your medical records in particular for chronic diseases or health problems that have affected yourself and other family members.
Weight: Insurers may look at the applicants BMI to assess whether there are any associated health risks as a result of the persons weight.
Occupation: Some occupations are classified as “high-risk” which means they face a greater chance of accidental death than normal occupations. People in these occupations will in most cases pay a higher premium.
What if I have a pre-existing medical condition?
Life insurance may be expensive and difficult to take out if you are not in good health and have pre-existing conditions as diagnosed by a medical practitioner, but it is still possible. For example, smokers, people who are overweight, people with mental illnesses and diabetics are not excluded from obtaining life insurance, but may need to contribute more to premium payments to take out a policy. Some people may be discouraged from seeking life insurance due to pre-existing conditions but it must be emphasised that it is not impossible to find an affordable policy for you.
One thing you should not do is to try and withhold information or not tell your insurance provider about any pre-existing conditions that you may have. When you try to claim benefit payments and they have discovered conditions you have not told them about, your policy will be void and your provider may refuse to pay you or your family your benefit.
What to expect when applying for cover
Once you have found a policy that you are happy with, either through an adviser or direct from an insurer, you may begin your policy application.
There are a few steps in the application process that you should be aware of:
You will need to complete an application to purchase the life insurance policy you want. This involves basic information about you as well as personal information relating to health and lifestyle. You may also be required to take a medical exam.
Your application will then be assessed by the life insurance company, who will either accept the proposed terms of the policy, or reject it. If for some reason they do not accept the application they will generally offer you an amended version of the policy with these changes being a possibility:
> An increased premium level to cover an unexpected level of risk
> An exclusion to a specific medical condition or activity
Once you policy has been finalised, your policy will be issued and become effective.
You should keep in contact with your life insurance provider if circumstances change in the future and if you policy needs to be amended in any way.
Some final tips for purchasing cover
Read the PDS: The Product Disclosure Statement is a detailed document available for each policy offered by every provider containing all the information required regarding policy features and terms and conditions.
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Clarification: Ask your insurance provider many questions to make sure that you are receiving what you are paying for. Ensure you understand all the details of your policy, know exactly what you are covered for and under what circumstances your benefit may not be payable. Do not buy a life insurance policy you don’t understand.
Duty of Disclosure: It is important you answer all the questions in the application truthfully as your policy will be void if you do not.
Check inflation-indexation: Check if you policy is adjusted according to inflation so that your coverage amount keeps up with the cost of living.
Guaranteed Renewable: Check that your insurance policy is Guaranteed Renewable, which ensures that your policy cannot be cancelled or changed by the insurance agency without your consent.
Maintain a Healthy Lifestyle: Try and reduce your premiums as much as possible by reducing risky activities such as smoking. Try and lose weight if you are overweight and reduce your cholesterol and blood pressure if they are high.
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