What products sit under the umbrella of life insurance and how do they differ?

Life insurance, Income Protection, Trauma insurance, and Total and Permanent Disability (TPD) insurance are all different type of insurance policies. They are all designed to provide financial protection, but in different circumstances. The key features of each of these products are summarised below.

Life insurance or Life cover:

Purpose: Life insurance provides a lump sum payment (death benefit) to your beneficiaries or estate in the event of your death. Life insurance is important if you have financial dependents and want to protect their well-being if you pass away. It can be used to cover funeral expenses, replace lost income, pay off debts (e.g., mortgages), and provide for dependents.

Pay out details: There is usually a funeral advance benefit, which is an advance of the life cover amount to assist with funeral expenses. Life insurance payouts can sometimes be tax-free, particularly when they will be paid to someone who is dependent on you, such as children under the age of eighteen.

Income protection insurance:

Purpose: Income protection insurance provides a replacement income if you become unable to work due to illness or injury. Income protection can be valuable if you rely on your income to maintain your standard of living or don’t have sufficient savings or sick leave to cover extended periods of disability.

It covers a portion of your lost income, typically up to 70% of your pre-disability income for a designated period. With most policies you will be able to choose the period for which you will be entitled to claim benefits. For example, with NobleOak’s Income Protection product (called Individual Disability Income) you can choose to receive payments for either up to two years, five years or up to 65 years of age.

Pay out details: Benefits are generally paid as regular monthly payments, often with a waiting period before the payments start.

Trauma Insurance

Purpose: Trauma insurance provides a lump sum payment if you are diagnosed with a specified critical illness or medical condition (e.g., cancer, heart attack). These will be specified in the Product Disclosure Statement. For example, with NobleOak’s Trauma Insurance, 37 serious medical conditions are covered. Trauma insurance can be beneficial if you need financial support in dealing with medical expenses and lifestyle changes following a critical illness diagnosis.

The lump sum payment can help cover medical expenses, treatment costs, and lifestyle adjustments during recovery.

Pay out details: The benefit is paid upon diagnosis, and you do not have to be permanently disabled or pass away to receive it.

Total and Permanent Disability (TPD) Insurance:

Purpose: TPD insurance provides a lump sum payment if you become totally and permanently disabled, preventing you from working. It can be used to cover medical expenses, rehabilitation, and lifestyle adjustments due to disability. TPD insurance is helpful if you want financial security in the event of a severe disability that leaves you unable to work.

It typically covers disabilities that render you unable to perform work in your occupation or any occupation.

Pay out details: The benefit is paid when you meet the policy’s definition of total and permanent disability. This definition may vary between policies.

Is it common for people to take out more than one type of insurance type?

Some people may take out all available insurance products and some may only take out one. It really depends on your personal circumstances and what is most important to you. Factors to consider include your age, dependents, financial obligations, savings, and personal health.

A fictional case study is provided below to demonstrate an example of someone who has taken out all of the above Life insurance products:

Case Study: Sarah’s Insurance Portfolio

Background:

Sarah is a 35-year-old professional with a stable job and a family. She is the primary breadwinner, and her husband is a stay-at-home parent caring for their two young children. Sarah is concerned about the financial wellbeing of her family in the event of her death, a serious illness, or a disability that prevents her from working.

Insurance Portfolio:

Life Cover:

Coverage: $1,000,000

Purpose: In the unfortunate event of Sarah’s death, the life cover provides a lump sum payment of $1,000,000 to her beneficiaries (her husband and children). They can choose to use this money to cover immediate expenses, pay off outstanding debts, and provide long-term financial support for the family.

Income protection insurance:

Coverage: 70% of her monthly income

Waiting Period: 30 days

Benefit Period: Two years

Purpose: If Sarah is unable to work due to illness or injury, after a 30-day waiting period her income protection insurance will provide a monthly benefit equivalent to 70% of her regular income. This helps cover her ongoing living expenses, mortgage payments, and other financial obligations during her period of disability, up to a maximum of two years.

Total and Permanent Disability (TPD) insurance:

Coverage: $500,000

Definition: Own Occupation

Purpose: In the event that Sarah becomes totally and permanently disabled and is unable to work in her current occupation, the TPD insurance provides a lump sum payment of $500,000. This money can be used to cover medical expenses, rehabilitation, and modifications to their home to accommodate her disability.

Trauma insurance:

Coverage: $250,000

List of Covered Conditions: Cancer, heart attack, stroke

Purpose: If Sarah is diagnosed with a covered critical illness (e.g., cancer, heart attack, or stroke), the trauma insurance provides a lump sum payment of $250,000. This money can be used to cover medical treatments, lifestyle adjustments, and any other expenses related to the critical illness.

Rationale:

Comprehensive coverage: Sarah has chosen a comprehensive insurance portfolio to address various financial risks, including death, disability, and critical illnesses.

Family protection: The life cover provides her family with financial support in the event of her death, while income protection and TPD provide ongoing support in case of disability.

Critical illness protection: Trauma insurance provides an additional layer of protection for specific critical illnesses, offering financial assistance during challenging times.

It is important to note that the specific coverage amounts, policy terms, and conditions can vary based on individual circumstances, insurers, and policy choices. This case study is for illustrative purposes only and doesn’t represent specific product recommendations. Individuals should carefully review policy details and tailor coverage to their unique objective, financial situation and needs.