Nobody Thinks They Need Life Insurance Until Someone Does
There's a version of this conversation that happens in financial planning offices regularly. A couple comes in. They're doing well: dual income, young kids, mortgage, busy lives. They've been meaning to sort out insurance for a while. They've just never quite got around to it.
And then at some point, they do get around to it.
The reason they finally get around to it is usually that something has happened. A diagnosis. An accident. A friend who wasn't as lucky. The theoretical conversation about risk becomes a very concrete one about what happens to your family if you're gone or can't work.
This article isn't meant to frighten anyone. It's meant to explain how personal insurance actually works in Australia, clearly and without the sales pitch, so you can make an informed decision about what you need.
The Four Main Types
Life insurance pays a lump sum to your nominated beneficiaries if you die. It's designed to replace your income, pay off debt, and cover future expenses for the people who depend on you. The amount you need depends on your debts, your income, your dependants, and how long they'd need financial support.
Total and Permanent Disability (TPD) insurance pays a lump sum if you become permanently disabled and are unlikely to ever work again. It covers things like home modifications, care costs, and the loss of a lifetime of income.
Income protection insurance pays a monthly benefit (typically 70% of your income) if you're unable to work due to illness or injury. Unlike life or TPD, it's ongoing rather than a lump sum. It's also the most commonly claimed type of cover, because illness and injury are far more common than death during working years.
Trauma insurance (also called critical illness cover) pays a lump sum on diagnosis of specific conditions including cancer, heart attack, and stroke. It's designed to cover costs that arise during recovery: medical treatment, reduced capacity to work, and changes to your lifestyle while you get through it.
Why the Defaults Often Aren't Enough
Most Australians have some life and TPD cover through their superannuation fund. What many don't realise is that the default amounts are usually based on a formula, typically a multiple of your salary or a flat amount, rather than what you'd actually need.
A 35-year-old with a $700,000 mortgage, two kids, and a partner who'd need to stop working to provide care may need significantly more cover than a generic formula provides. The reverse is also true: someone with minimal debt and no dependants may be paying premiums for more cover than they'll ever use.
The default is better than nothing. But it’s not tailored to you.
The Definitions Matter
One of the least glamorous but most important parts of insurance is the policy wording, specifically how the insurer defines what triggers a claim.
TPD cover is a good example. There are two common definitions:
Any occupation: you can't work in any job suitable to your skills and training
Own occupation: you can't work in your specific occupation
The own occupation definition is tighter and generally more valuable, but it's often only available outside of super and typically costs more than Any Occupation cover. For anyone in a specialised profession, the difference between these two definitions is significant.
Income protection has similar nuances. The waiting period before payments start, the benefit period, and whether the policy is agreed value or indemnity value all affect what you'd actually receive in a claim.
Reading a product disclosure statement (PDS) cover to cover isn't anyone's idea of a good afternoon. But understanding what you're actually covered for is the whole point.
How Much Cover Is Enough?
There's no formula that works for everyone, but a useful starting point is to ask: if you couldn't work from tomorrow, what would your family need to cover?
For life insurance: debts (mortgage, car loans), plus income replacement for however many years your dependants would need support, plus any future expenses like education costs.
For income protection: your monthly take-home income, minus what your household could manage without, minus any sick leave or other entitlements that would kick in first.
For TPD and trauma: lump sum costs such as mortgage, care, potential home modifications, and medical costs not covered by Medicare or private health.
Getting this right requires real numbers, your actual financial position rather than a rough estimate, and a clear picture of what your household would actually need.
What Will It Cost Me?
Good cover is not cheap. But the cost of being underinsured, or uninsured, is almost always higher.
Income protection premiums are generally tax-deductible when held outside of super. Life and TPD premiums held inside super come from your super balance rather than your cash flow, which many people find easier to manage in the short term, though it does reduce the balance you're growing for retirement.
There are genuine trade-offs in how you structure cover. The right answer depends on your tax position, your cash flow, and how each type of cover interacts with your overall financial picture.
The Conversation Worth Having
A financial adviser can look at your actual situation, including your income, debts, dependants, existing cover, and budget, and recommend what you genuinely need rather than what a generic calculator produces.
The goal isn't to be over-insured and paying premiums unnecessarily. It's to have the right cover in place so that if something does happen, your family's financial future isn't one of the things they have to worry about.
That's what this is actually for.
This article is general information only and does not take into account your personal circumstances. Before making any decisions about personal insurance, speak with a licensed financial adviser.
