What is Life Insurance cover and how does it work?

Navigating life insurance terminology can be confusing. What is life insurance? How does it work? What does ‘beneficiary’ mean? What is a ‘lump sum’?

Understanding insurance language can help you make informed decisions about which product is best for you and how life insurance cover can help your family’s financial security.

The first question is: ‘What is life insurance’?

Life insurance cover is a contract – a legal agreement – between an insurer and a policyholder. Life Insurance can also be referred to as Death Cover or Term Life Insurance.

A Life Insurance policy sets out the amount the insurer will pay as a lump sum to the policyholder’s nominated beneficiaries in the event of the policyholder’s death. This payment occurs in exchange for premiums paid by the policyholder during their life either monthly or annually. Depending on the policy, other events such as terminal illness with shortened life expectancy, may also trigger  payment of the lump sum. Other features can include an advance funeral benefit.

Life Insurance is also used as a universal term. It can be confusing because the term is often used as a broad term to describe a range of insurance products, such as:

• Life Insurance cover (Death Cover or Term Life Insurance)
• Total and Permanent Disablement (TPD) Insurance
• Trauma Insurance (also called Serious Illness Insurance)
• Income Protection Insurance

In this article, when we say “life insurance” we’re using the term to mean ‘life insurance cover’ (that is, Death Cover or Term Life Insurance) rather than using it as a broad, umbrella term.

Some common terms used in Life Insurance:

Beneficiary is someone who receives the benefits of your life insurance policy. Beneficiaries can be individuals, multiple persons, or entities (such as charities, non-profits, or trusts). When you nominate loved ones as your beneficiaries you are making a choice which is likely to help protect their financial future.

Benefit is the total amount payable under the cover in the event of a claim. With life insurance, this payment is generally paid as a Lump sum and is paid to your nominated beneficiaries. It is also known as a Death Benefit when associated with Life Insurance.

Expiry age represents the age when the policyholder can no longer renew their policy. All Life Insurance policies have an expiry age – the expiry age commonly ceases when the policyholder is aged 99 but this might vary depending on the insurance company.

Insurer is the life insurance company who issues the life insurance policy and pays out the claim to the beneficiaries.

Life Insured is the person who is covered under the life insurance policy.

Lump sum is a single payment of money, or Benefit, rather than a series of payments over time. The lump sum is the agreed cover (policy) amount. This lump sum – also called a Death Benefit –is paid by the insurer to the beneficiaries (or in some cases, to the estate of the life insured)

Policyholder is the person who owns the policy and is usually the person covered under the policy. However, the policy could cover another person rather than the policyholder (and where this is the case, this person is usually referred to as the Life Insured).

Premium is the amount paid by the policyholder to maintain the Life Insurance policy. These payments can be made monthly or annually, however, monthly premium payments often attract a loading.

How does Life Insurance work?

You pay a monthly or annual payment (Premium) to your insurer. Your premiums are calculated based on your chances of dying and the level of cover selected. Factors such as your age, gender, smoking status, health and lifestyle are also taken into account. To begin a Life Insurance application there are generally three options: apply directly to an  insurer, through a financial adviser, or via your superannuation. Before you buy Life Insurance, by law, the insurer must provide you with a Product Disclosure Statement (PDS). This sets out what you will be covered for (Benefits), what you will not be covered for and other key features of the policy including exclusions or limitations under the terms of the cover.

Why have Life Insurance?

Life can be unpredictable. An unexpected or sudden death is one of life’s unfortunate events that you and your family should consider planning for. For these reasons, Life Insurance can be important because it can offer a measure of financial protection to your family if you die (or become terminally ill, in the case of some policies). It can help protect your partner and/or children who may otherwise be left with financial burdens such as living expenses, mortgage, debts, funeral costs and school fees.

Life Insurance can provide a lump sum to help take financial care of your family in the event of your death when you are not there to take care of them yourself.

To find out more about NobleOak’s life insurance cover or to get a quote, call NobleOak on 1300 014 494 to talk to one of our Australian-based team members.

NobleOak Life…protecting Australians for over 140 years.