Chapter 03 – Life Cover

As the name suggests, life cover is an insurance policy that pays an amount to beneficiaries if the insured person dies.

The most common form of life cover is term life insurance. Term life insurance is an insurance policy that pays an agreed benefit in the event that the insured person dies or becomes terminally ill. The maximum age at which the insurer will continue to insure the policy holder varies, but is typically pegged at age 65.

Most term life policies will pay a benefit in the event that a person is diagnosed with a terminal illness and has less than 12 months to live. Some policies allow for part of the benefit to be paid in such a circumstance; other policies allow the entire benefit to be paid.

The word ‘term’ in the name ‘term life insurance’ indicates that the insurance policy only lasts for a set period (‘the term’ of the policy. This period is usually a year. In order for the policy to continue beyond the end of the insurance period, the client needs to ‘renew’ the policy. This is usually done each year.

Renewing the policy

Most policies are guaranteed renewable. This means that the insurer must agree to renew the policy each year regardless of any changes in the health status of the insured person. This means that even if an insured person becomes ill, the insurer is obliged to keep renewing the policy. As long as the person’s health did not start to fail until after they first commenced the policy, the insurer must renew the policy.

For example, Lilian commenced term life cover when she was 35. She is now 45, and has recently been diagnosed with cancer. As long as she continues to pay her annual premium, she will receive a payment if she dies of cancer. The insurer cannot decline to keep renewing the term of the policy.  

Term life insurance is usually taken out by people with financial dependants who would suffer financially if the insured person died. For example, parents with dependent children typically insure their lives so that their children are looked after financially if the parent dies.

Who gets the benefit?

Most term life policies allow the policy holder to nominate the person(s) to whom payment should be made in the event of their death. If no nomination is made, then the insurer typically has discretion as to whom the payment should be made. Usually, the insurer will pay the benefit to the deceased’s estate, in which case the deceased’s executor will have the responsibility of distributing the money in accordance with the deceased’s will. 

Who uses Life Cover?

People who normally should take out life cover include:

  • Mums and dads still raising their children;
  • Potential mums and dads who are trying to, or may have already become, pregnant;
  • Husbands or wives (married or de facto) whose partner relies on their income; and/or
  • Anyone else with financial dependants.

The key is financial dependency: people who are financially dependent on another person will suffer financially if that other person dies. Life cover reduces the financial effect of the insured person dying. 

To learn more about Life Cover, please visit the ASIC website here.

The Dover Group