Life Insurance

What is life insurance?

Life insurance — sometimes called death cover or term life insurance — pays a lump sum benefit to your nominated beneficiaries if you die, or in most cases, if you are diagnosed with a terminal illness (typically defined as a life expectancy of less than 12 or 24 months, depending on the policy).

The purpose of the benefit is to help replace the financial contribution you make to your family or dependants. This might include covering a mortgage, clearing debts, funding children's education, or simply providing ongoing living expenses for those who relied on your income.

Who typically considers life insurance?

Life insurance is commonly considered by people who have others depending on them financially. This might include:

• People with a mortgage or significant debts that would fall to a partner or family member
• Parents with dependent children
• People whose partner relies on their income to maintain their standard of living
• Business owners with loans, guarantees, or business partners
• People who want to ensure their estate can cover final expenses, debts, or bequests

People without financial dependants or significant debts may have less need for life insurance, though individual circumstances vary.

How does it work?

You apply for a policy with a chosen sum insured — the lump sum amount that would be paid on a valid claim. You pay regular premiums (monthly or annually) to keep the policy active. If you pass away or are diagnosed with a terminal illness while the policy is in force, the insurer pays the sum insured to your nominated beneficiaries or your estate.

Key terms

• Sum insured: The lump sum amount you choose when you take out the policy. This can typically be adjusted over time.
• Beneficiary: The person or people nominated to receive the benefit. For policies held outside super, you nominate beneficiaries directly. For policies inside super, beneficiary nominations are made through your super fund.
• Terminal illness benefit: Most life insurance policies include a terminal illness benefit, which allows early payment of the sum insured if you are diagnosed with a terminal illness. The definition of "terminal" varies between insurers but typically means a life expectancy of 12 or 24 months or less.
• Premiums: The regular payments you make to keep the policy in force. These can be structured as variable age-stepped or variable premiums (see below).

Variable age-stepped vs variable premiums

This is one of the most important decisions when structuring a life insurance policy. You may also see these referred to by their previous names — "stepped" and "level" premiums — as the industry updated the terminology at the end of 2024 to better reflect how each structure works:

• Variable age-stepped premiums (previously "stepped") start lower and increase each year as you age. They are recalculated annually based on your age at each renewal. Variable age-stepped premiums are typically cheaper in the early years but become more expensive over time.
• Variable premiums (previously "level") are calculated based on your age when the policy starts (your "entry age") and are designed to remain more stable over time. However, they are not guaranteed to stay the same — the insurer can still adjust them for factors such as claims experience or regulatory changes. They cost more initially but can be more cost-effective over the long term if you intend to hold the policy for many years.

Key features to understand

Indexation

Many policies offer indexation, which automatically increases your sum insured each year (typically in line with CPI or a fixed percentage like 5%) to help your cover keep pace with inflation. Your premiums will also increase to reflect the higher sum insured. You can usually opt out of indexation increases if you prefer.

Policy ownership

Life insurance can be held in different ways, and the ownership structure can affect tax treatment, who controls the policy, and how benefits are paid:

• Self-owned: You own the policy directly. You have full control over the policy and beneficiary nominations.
• Super-owned: The policy is held inside your superannuation fund. Premiums are paid from your super balance, which can reduce the direct cost to your cash flow. However, beneficiary nominations must be made through the super fund, and there may be tax implications on the benefit depending on the beneficiary's relationship to you.
• Cross-ownership: Common in business contexts, where business partners own policies on each other's lives.

Exclusions

Most life insurance policies have some standard exclusions. Common exclusions may include death resulting from self-inflicted injury within a specified period (typically 13 months from policy commencement), or death as a result of an act of war. Specific exclusions vary between insurers and policies, so it is important to read the Product Disclosure Statement (PDS) carefully.

Life insurance inside super vs outside super

Many Australians already have some level of life insurance through their superannuation fund — often a default level of cover that was set up automatically when the fund was opened.

Many people choose to hold some cover inside super (to reduce cash flow impact) and some outside super (for greater control and flexibility). The right mix depends on individual circumstances.

How much cover do people typically consider?

There is no single "right" amount of life insurance — it depends on individual circumstances. However, common approaches to thinking about cover levels include:

• Income replacement: A multiple of annual income (e.g. 10× gross income) to provide ongoing support for dependants
• Debt coverage: Enough to clear the mortgage and any other significant debts
• Needs-based: A more detailed calculation factoring in specific expenses such as mortgage repayments, living costs, children's education, and any other financial commitments your family would need to meet

Our needs analysis tool can help you think through what level of cover people in similar situations commonly consider.

Common questions

Do I need life insurance if I'm single with no dependants?

If no one depends on your income, the need for life insurance is generally lower. However, some people still consider a smaller amount to cover funeral costs, outstanding debts, or to leave a bequest. Individual circumstances vary.

Can I change my cover amount later?

Most policies allow you to increase or decrease your sum insured. Increases may require additional underwriting (medical questions or assessments). Decreases can typically be made at any time and will reduce your premiums.

What happens if I stop paying premiums?

If you stop paying premiums, your policy will generally lapse after a grace period (typically 30–60 days). Once lapsed, you would no longer be covered. If you want to reinstate the policy, you may need to go through underwriting again.

Is the benefit taxed?

For policies held outside super, lump sum life insurance benefits paid to a dependant (as defined for tax purposes) are generally tax-free. For policies held inside super, the tax treatment can vary depending on the components of the benefit (taxable vs tax-free) and the relationship of the beneficiary to the deceased. Tax rules are complex and can change — consider seeking professional advice.

What is underwriting?

Underwriting is the process the insurer uses to assess your application. It typically involves questions about your health, medical history, occupation, lifestyle, and pastimes. Based on this information, the insurer may offer standard terms, apply loadings (additional premium), apply exclusions, or in some cases decline cover. Some policies offer simplified underwriting with fewer questions, while others require more detailed medical information.

Next steps

If you'd like to explore whether life insurance might be relevant to your situation, you can: