What would not cause the death benefit to increase?

Life insurance is designed to provide valuable peace of mind, but you may have heard of instances where payouts are denied. Here’s our guide to avoiding unsuccessful claims. 

1. Premiums were not up to date 

2. The insurance policy had come to term

3. The cause of death was not covered by the policy

When you sign up for life insurance, the Product Disclosure Statement contains all of the terms and conditions attached to that policy. Here, you will notice that certain causes of death are not covered by life insurance. Often, these will include death caused by certain extreme sports, or which takes place in countries the Australian government has advised against travel to. In some policies, certain pre-existing illnesses are also not covered.

TAL life insurance offers a range of additional cover that can help to ensure your beneficiaries receive a payout. This includes:

• Accident cover, which ensures you are covered in case of unforeseen events like car accidents. 
• Illness cover, which covers illnesses like cancer, neurological or heart disease and includes terminal illness cover which can pay out your lump sum if your prognosis is less than 12 months.
• Adventure sport cover, which ensures your policy will be valid if you die from an accident caused by an adventure sport like scuba diving or paragliding.

With all insurance policies including any extras, you should always read the terms and conditions to make sure you understand what is and isn’t included. This will help you and your family avoid any unwelcome surprises further down the line.

4. Death is caused by suicide within the first 13 months of cover

5. The policyholder did not disclose information about existing health conditions

When you apply for health insurance, there are often a number of questions about your occupation, health and lifestyle, including any pre-existing conditions you may have. It is always important to be honest in answering these questions. If you die due to an existing condition that was not disclosed to your insurer, your claim may be declined and your life insurance policy voided

If you need to make a claim with TAL, you will be supported by a dedicated Claims Consultant. Find out more about how to make a claim here. 

A sudden death can place financial stress on those who depend on you. If this happens, life cover can help them pay the bills and other living expenses.

What is life cover

Life cover is also called 'term life insurance' or 'death cover'. It pays a lump sum amount of money when you die. The money goes to the people you nominate as beneficiaries on the policy. If you haven't named a beneficiary, the super trustee or your estate decides where the money goes.

Life cover may also come with terminal illness cover. This pays a lump sum if you're diagnosed with a terminal illness with a limited life expectancy.

Accidental death insurance is different from life cover. It will only pay out if you die from an accident. It will not provide cover if you die from an illness, disease or suicide. This type of cover often has a lot of exclusions.

To understand what's covered under a policy and the exclusions, read the product disclosure statement (PDS).

Decide if you need life cover

If you have a partner or dependents, life insurance can help repay debt and cover living costs if you die.

If you don’t have a partner, or people who depend on you financially, you may not need life cover. But consider getting trauma insurance, income protection insurance or total and permanent disability (TPD) insurance in case you get sick or injured.

How much life cover you might need

To decide how much life cover to get, consider how much money you or your family would:

• need — to pay the mortgage, credit cards and any other debts, child care, school fees and ongoing living expenses
• receive — from super, savings, the sale of any investments, your paid leave balance, and support from your extended family

The difference between these is the amount of cover you should get.

If you need help deciding if you need life cover, and how much, speak to a financial adviser.

How to buy life cover

Check if you already hold life insurance through super. Most super funds offer default life cover that's cheaper than buying it directly. You can increase your level of cover through your super fund if you need to.

You can also buy life cover from:

• a financial adviser
• an insurance broker
• an insurance company

Life cover can be bought on its own or packaged with trauma, TPD or income protection insurance. If it's packaged, your life cover may be reduced by any amount paid on other claims in the package. Check the PDS or ask your insurer.

Life cover premiums

You can generally choose to pay for life cover with either:

• stepped premiums — recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
• level premiums — charge a higher premium at the start of the policy, but changes to cost aren't based on your age so increases happen more slowly over time

Your choice of stepped or level premiums has a large impact on how much your premiums will cost now and in the future.

Compare life cover

Once you know how much life cover you need, shop around and compare:

• benefits and policy features
• exclusions
• waiting periods before you can claim
• limits on cover
• the cost of the premiums — now and in the future

A cheaper policy may have more exclusions, or it may become more expensive in the future. You can find information about the policy on the insurer's website or in the product disclosure statement (PDS).

What you need to tell your insurer

An insurer will ask you questions when you apply for or change your insurance. These questions may be about your: 

• age
• job
• medical history
• family history, such as a history of disease
• lifestyle (for example, if you're a smoker)
• high risk sports or hobbies (such as skydiving)

If an insurer doesn't ask for your medical history, it may mean that the policy has more exclusions or narrower policy definitions.

The information you provide will help the insurer to decide:

• if they should insure you
• how much your premiums will be
• terms and conditions for your policy

It is important that you answer the questions honestly. Providing misleading or incomplete answers could lead an insurer to cancel or vary your cover, or decline a claim you make.

Making a life cover claim

If someone close to you dies and you need to make a claim, or if you need to make a terminal illness claim, see how to make a life insurance claim. 

Permanent life insurance allows owners to select two death benefit options for when the policyholder dies: a level death benefit, sometimes called Option 1, or an increasing death benefit, also known as Option 2. The first is the same whenever a person dies, be it shortly after purchasing a policy or many years down the road, while the latter rises in value over the years. Most universal life (UL) insurance policies allow owners to switch between level or increasing death benefits with few restrictions.

• An increasing death benefit is an option offered in permanent life insurance policies. It rises in value over years.
• The other options is a level death benefit, which remains unchanged whenever a person dies, be it shortly after purchasing a policy or many years down the road.
• In an increasing benefit, the growth of the cash value depends on the amount of premium paid.

Whole life insurance policies have a few more options to consider. These policies produce dividends that can be used to purchase additional coverage, thus increasing the death benefit. However, other dividend options include taking cash, reducing premiums or earning interest on accumulated dividends.

Depending on which choice you make, the death benefit of a policy can increase as the cash value grows. (Read more about how whole life insurance works.)

In a whole life policy with a level death benefit, fees and sales charges are deducted from the premium and the remainder is credited to the cash value. The cost of insurance is then deducted from the cash value each month. Over time, as premiums are paid, the cash value of the policy increases and the amount of insurance purchased each month gradually decreases. For example, in year two, a $500,000 policy might have a cash value of $1,500. Therefore, only $498,500 of insurance is purchased.

Upon the death of the insured, the insurance company pays a death benefit consisting of insurance and a return of the policy's cash value. Assume the owner paid the premium for a $500,000 policy for 15 years, accumulating a cash value of $65,000. The insurance company would pay $435,000 for insurance and return the $65,000 cash value, for a total benefit of $500,000.

Conversely, if the policy is universal life insurance with an increasing death benefit, upon the death of the insured, the beneficiary receives $500,000 of insurance plus any accumulated cash value.

In UL policies with an increasing death benefit, the owner buys $500,000 of insurance. However, the growth of the cash value depends on the amount of premium paid. If the premium is the same as what a level death benefit policy premium would be, the cash value in the policy with an increasing death benefit would likely be lower since more insurance is being purchased each month.

Terms of whole life policies are distinct in that dividends can be used to buy additional insurance, thus increasing the death benefit by small increments as additional insurance is purchased each year.

A variety of reasons exist for choosing increasing death benefits as opposed to level death benefits:

• A policy owner may temporarily need a higher amount of insurance. This works especially well when the insured is younger and the cost of insurance is lower. The policy owner may later switch back to a level death benefit.
• A policy owner may need a death benefit that will continue to increase. For example, if insurance is being used as part of a business succession plan, level death benefit coverage may not provide an adequate replacement value for a growing business without an increasing death benefit. (Read more about insurance in succession planning.)
• A policy is purchased as part of a savings strategy designed to supplement retirement to rapidly build cash value by over-funding the policy in the early years. It's worth noting that oversight must be exercised in deploying this strategy: the policy risks becoming a modified endowment contract if the amount of premium paid exceeds the seven-pay test without an increasing death benefit.

Owners of permanent life insurance policies can choose between a level death benefit or an increasing death benefit. These are sometimes referred to as options 1 and 2. The level benefit is the same whenever a person dies, be it shortly after purchasing a policy or many years down the road. An increasing benefit rises in value over the years.

Remember that most universal life insurance policies allow owners to switch between level or increasing death benefits with few restrictions, so you can change your mind. If you feel like you need a higher level of insurance, the increasing benefit may work well for you. Also, if insurance is being used as part of a business succession plan, level death benefit coverage may not provide an adequate replacement value for a growing business without an increasing death benefit. If you're not sure what to do, call a broker with your questions.

Once determined that you need permanent life insurance, consider your options closely. There are many ways to tailor coverage to meet your needs, and an experienced independent insurance broker is an excellent resource of insight and assistance.