Insurance Explainer: What's the Difference?

Confused about life insurance and what it covers? Here you have it – the four most common kinds of life insurance, explained.
Insurance Explainer: What's the Difference?

Depending on your particular circumstances and needs, there are generally four different types of life insurance cover. There’s no need to scratch your head and trawl the online abyss for basic tips and tricks. Everything you need to know is laid out below.

Term life insurance

Term life insurance is also called ‘life cover’ or ‘death cover’. Confusing, we know. This kind of insurance pays a lump sum if you die, which goes directly to the people you have nominated as beneficiaries on your policy. 

What will term life insurance cover me for?

Term life insurance is designed to provide a financial benefit in the event of terminal illness or death.

Total Permanent Disability (TPD) insurance

Total Permanent Disability (TPD) insurance provides for you in the event of a permanent disability due to an accident or illness that renders you unable to work. 

This type of insurance pays a lump sum to help with medical and rehabilitation fees and living expenses, in order to alleviate the financial burden that comes with being unable to work. 

What will TPD insurance cover me for?

Depending on the policy you purchase, TPD insurance can cover you if:

  • You can’t work again in any occupation
  • You’re unable to continue working in your chosen occupation

Trauma insurance

Trauma insurance is also called ‘critical illness cover’ and covers you if you’re diagnosed with a major illness like cancer, heart disease, stroke, or other life-threatening conditions. It’s also referred to as ‘critical illness cover’.

What will trauma insurance cover me for?

Aside from the info outlined above, what's covered under a trauma insurance policy and medical definitions can differ between insurers. To understand your level of coverage, it’s always best to read the Product Disclosure Statement (PDS) before selecting a policy.

Trauma insurance can be used to help pay for:

  • Out-of-pocket medical costs
  • Living expenses for you and your family while you're unable to work
  • Therapy, nursing care and special transport costs
  • Changes to housing (if needed)
  • Debt, like a mortgage

Income protection

Income protection pays a portion of your income if you’re unable to work due to illness or injury. This type of insurance is designed to replace your income. The amount is typically based on your annual earnings in the 12 months prior to illness or injury.

Mortgage protection insurance and redundancy cover also typically falls under the umbrella of income protection, but check your PDS to be sure.

What will income protection insurance cover me for?

If you’re unable to work due to partial or total disability, income protection insurance pays:

  • Up to 90% of your pre-tax income in the first six months
  • Up to 70% for a specified time after six months

Wrap up

At the end of the day, there’s no one-size-fits-all approach to selecting a life insurance policy for you and your family. It pays to assess your insurance needs and choose a cover you can afford, do your research and of course, read those Product Disclosure Statements (PDS) carefully. 

Head still spinning? Read our complete guide to life insurance here. 

Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice.

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