How Life Insurance Works: A Step-by-Step Guide to Key Cover Types and Policy Choices
What “life insurance” means in practice
“Life insurance” is a general term used for a range of insurance covers that look after you if something unexpected happens to your body or mind. These covers are designed to protect your quality of life and the future you’ve planned for your loved ones. Because the category includes different types of insurance that protect you in different ways, it helps to approach the decision as a structured process rather than a single purchase.
Step 1: Identify which types of cover you may need
A practical first step is to consider which types of insurance you need to help you live the life you’ve planned. Each insurance protects your life in a different way, so clarifying the role of each cover can make it easier to decide what belongs in your overall plan.
Within the life insurance category, common cover types discussed include:
- Life Insurance cover
- Critical Illness or Trauma Insurance
- Total and Permanent Disability (TPD) insurance
- Income Protection Insurance
Step 2: Decide how much you want to be insured for
Everyone’s life and budget is different, so considering how much you want to be insured for is an important step. This decision is closely linked to what you want the insurance to protect—whether that is the future you’ve planned for your loved ones, your quality of life, or support while you work toward returning to wellness.
Step 3: Understand how benefits are paid across cover types
Different covers can pay benefits in different ways. Understanding the payment structure matters because it affects how the insurance might support you when you need it.
Lump-sum benefits: Life Insurance cover and Critical Illness or Trauma Insurance are paid as lump sums.
TPD benefits: TPD is usually paid as a single lump sum, but partial payments can apply under the TPD Support Option (TSO).
Step 4: Learn how TPD claims may be assessed (standard vs TSO)
TPD can be straightforward in some situations and more structured in others, depending on what contributes to or causes the disability and whether the TPD Support Option (TSO) applies.
When TSO applies
Under TSO, when TPD is contributed to or caused by a TPD Support Condition (such as a mental condition or disorder, fatigue or functional disorder, or other specific syndromes or disorders), claims are assessed using the TSO definitions of Total and Permanent Disability. This uses a definition similar to the “Any Occupation” definition.
If TSO applies, the definition you selected for your TPD policy (Own or Any Occupation) won’t apply. Where TPD is contributed to or caused by any TPD Support Condition, partial payments of 20% of the TPD Benefit Amount are made at 12-month intervals. Each partial payment is subject to meeting the TSO Total and Permanent Disability requirements, and the partial payments continue until the Benefit Amount is paid in full.
When TSO does not apply
Claims for TPD that are not contributed to or caused by any TPD Support Condition are assessed once using the definition you selected (for example, Any Occupation or Own Occupation). If eligible, the benefit is paid as a single lump sum.
Step 5: For income protection, compare waiting periods and benefit periods
Income Protection Insurance has two important timing features: the Waiting Period and the Benefit Period. These settings can change both how quickly support begins and how long it can last.
Waiting Period: The length of time you have to wait after an injury or illness that stops you from working before you start accruing Income Protection Insurance benefits. Examples of waiting periods include 4, 6, 13, or 26 weeks. Shorter waiting periods generally cost more in premiums.
Benefit Period: The maximum length of time you could receive Income Protection Insurance payments. The longer your benefit period, the higher your premium.
Step 6: Consider how to structure your policy
Beyond choosing cover types and benefit amounts, it’s also important to consider how best to structure your policy. Policy structure can influence how premiums change over time and how the plan is set up.
Variable Age-Stepped Premiums vs Variable Premiums
One of the key structural choices described is the difference between Variable Age-Stepped Premiums and Variable Premiums.
Variable Age-Stepped Premiums: Calculated based on your age at each policy anniversary and the length of time you have had your policy. This means your premium will generally increase at each policy anniversary. There are a range of reasons why Variable Age-Stepped Premiums may increase.
Variable Premiums: Based on your age at the plan start date.
Ownership options and how premiums are funded
There are different ownership options available depending on the plan you choose. The type of ownership determines how premiums are funded and may have different tax implications in respect of the premiums and benefits paid. Understanding the ownership structure is therefore part of selecting a plan that aligns with how you want the policy managed.
Bringing it together: the central question to guide your decision
When comparing options, the most important question to ask yourself is how life insurance will help you protect those you love or assist your return to wellness so you can continue to make the most of the life you’ve planned. By stepping through cover types, benefit payment methods, TPD assessment pathways (including TSO), income protection timing features, and premium and ownership structures, you can build a clearer picture of what you are choosing and why.