What Is Term Life Insurance?
Term life insurance (also called death cover) pays a lump sum to your beneficiaries if you die or are diagnosed with a terminal illness (life expectancy under 24 months) during the policy term. Unlike whole-of-life policies, term insurance has no investment component - it is pure risk cover, which makes it far cheaper per dollar of benefit.
- Death benefit: Lump sum paid tax-free to non-financial dependants; 32% effective tax (17% flat + 2% Medicare) applies to taxable component paid to non-dependants such as adult children
- Terminal illness benefit: Most policies advance up to 100% of the sum insured on terminal diagnosis - use it to clear debt and fund palliative care
- Policy term: Usually renewable to age 70–80 (varies by insurer); some offer lifetime guaranteed renewability
- No cash value: Premiums buy pure protection - there is no surrender value or investment return
- Underwriting: Full medical underwriting at application locks in your health status; guaranteed renewable means the insurer cannot cancel or increase premiums due to a health change after issue
How Much Life Insurance Do You Actually Need?
The standard rule is 10× gross income, but a needs-based calculation is more accurate. Add up what your dependants would need if you died tomorrow, then subtract what they already have.
- Income replacement: Annual income × years until youngest child is self-sufficient (or partner reaches retirement); discount at ~3% real for a present value - e.g. $100k/yr for 20 years ≈ $1.49M
- Mortgage and debts: Outstanding home loan balance + investment loan balances you would not want your estate forced to sell
- Final expenses: Funeral ($10,000–$20,000), estate administration, legal fees (~$5,000–$15,000)
- Childcare and education: If the deceased was the primary carer, replacement childcare costs + private school fees if applicable
- Subtract existing assets: Super death benefit (check your fund balance + any existing group cover), savings, and partner's earning capacity
- Review every 3 years: Cover needs change as the mortgage reduces, children grow up, income rises, and super grows - do not set and forget
Life Insurance Inside Super vs Outside Super
Most Australians have default group life cover inside their super fund - but group cover has significant limitations compared to retail policies held personally.
- Inside super (group cover): Premiums paid from pre-tax super contributions - effective discount of 15%–47% depending on your marginal rate; no cash flow impact; default cover often requires no medical underwriting
- Inside super limitations: Cover erodes your retirement balance; definition is often 'any occupation' TPD (not 'own occupation'); paid to super fund trustee (not directly to beneficiaries) - potential tax and delay issues; auto-cancelled after 16 months of no contributions (Protecting Your Super 2019)
- Outside super (retail/personal policy): Premiums from after-tax income - no discount but full control; 'own occupation' definitions available; paid directly to nominated beneficiary with no fund trustee discretion
- Death benefit tax: If life insurance is held inside super and paid to an adult non-dependant child, the taxable component attracts 17% flat tax + 2% Medicare - a $1M policy could lose $190,000 in tax
- Binding nominations: If holding inside super, lodge a valid Binding Death Benefit Nomination (BDBN) - most lapse every 3 years; non-lapsing BDBNs available in some funds
- Recommended structure: Hold primary income replacement cover inside super for tax efficiency; hold any cover intended for adult non-dependants outside super to avoid death benefit tax
Who Needs Life Insurance - and Who Doesn't?
Not everyone needs large amounts of life insurance. The need is driven almost entirely by financial dependants and liabilities.
- High need: Parents with young children and a mortgage; single-income households; business owners with guarantees or buy/sell agreements; anyone whose death would force a fire-sale of assets
- Moderate need: Dual-income couples with mortgage and no children - cover the mortgage and 2–3 years of income replacement while the surviving partner adjusts
- Lower need: Singles with no dependants and no debt - perhaps enough for final expenses and to clear any personal loans
- Self-insured (no cover needed): Retirees with sufficient assets, no mortgage, and no dependants - the super and investment portfolio is the 'insurance'
- Business owners: Buy/sell (cross-purchase or entity purchase) agreements funded by life insurance allow a surviving business partner to buy the deceased's share at a pre-agreed value - prevents forced sale or unwanted new co-owners
- Key person insurance: Business insures a key employee - premiums deductible if proceeds replace lost revenue (capital purpose premiums are not deductible)
Comparing Life Insurance Policies - What to Look For
Price is not the only factor. Policy definitions and exclusions vary dramatically between insurers and can mean the difference between a paid and declined claim.
- Terminal illness definition: 12 months vs 24 months life expectancy - 24-month definition pays earlier and is preferable
- Indexation option: Automatic CPI-linking keeps pace with inflation; confirm the cap (usually 5%) and whether you can decline individual years
- Premium freeze option: Some policies allow you to freeze premiums at the cost of reducing sum insured - useful if cash flow tightens
- Guaranteed future insurability: Allows sum insured increases on specified life events (marriage, new child, mortgage) without medical underwriting - valuable while young and healthy
- Exclusions: Standard exclusions include suicide within 13 months of policy start, war, and illegal acts - read the PDS carefully for any non-standard exclusions added at underwriting
- ASIC requirements: Insurers must give you a Product Disclosure Statement (PDS) and Target Market Determination (TMD) - use these to compare like-for-like before price-shopping
Key Figures for Australian Life Insurance (2024–25)
Death benefit tax on taxable component to non-dependants: 17% flat + 2% Medicare levy = 19% effective (can reach 32% with untaxed element). Adult children are non-dependants unless genuinely financially dependent at time of death.
Super group cover auto-cancellation: Protecting Your Super Act 2019 - accounts with no contributions for 16 months + balance under $6,000 have insurance cancelled. ATO inactive low-balance account consolidation also applies.
APRA life insurance claims data (2023): 96.9% of death claims paid, 91.8% of TPD claims paid, 96.6% of trauma claims paid - use APRA claims data to compare insurer reliability before buying.
Average Australian life insurance sum insured: approximately $430,000 - well below the recommended 10× income for a median income earner. Underinsurance is a significant and well-documented gap.
Financial advisers must comply with Best Interests Duty (BID) under the Corporations Act when recommending any life insurance product outside of super. Commission on life insurance is capped at 60% upfront / 20% ongoing under the Life Insurance Framework (LIF) reforms.
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