Death and Disability Insurance

An illness can cost far more in monetary terms than just the value of the medical bills or health insurance premiums you pay. The disruption to your income stream can wreak havoc with your lifestyle (and/or that of your dependants), especially if the illness is prolonged or (yikes!) terminal.

Wherever there's a financial risk, the insurance industry is sure to be there with a product to cover you. And death and disability is no exception.

There are several different types of policy in the insurance marketplace, designed to maintain your financial security, and/or that of your family or other dependants.

You can get these policies directly from a life insurer – all the major general and life insurers offer them. Or you can use an intermediary, like a broker or an agent. They come as a stand-alone product, or several products bundled together.

Some policies are available via your superannuation fund – and usually at a very competitive price. But the amount of cover may be limited, so you may need to take out additional cover.

If you don't have dependants, or you wouldn't suffer financially from a disabling condition, then these policies probably aren't for you. Feel free to click your back button of your browser and visit another part of the site.

But if you do have dependants – and the consequences of your death and/or disability have been preying on your mind – then read on (we promise to keep it snappy).

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Term (Life) Insurance

This is a lump-sum payment in the event of your death, paid out to your nominated beneficiary. The payout can be used for any purpose – to pay off debts, or invested to generate an income stream for surviving family.

Premiums vary depending on age, sex, whether you smoke and your occupation – higher-risk occupations such as blue-collar manual work attract a higher premium than white-collar professional work.

Most policies will require you to have a medical examination and possibly blood tests. If you have a pre-existing medical condition you may have to pay an additional premium. Some policies won't pay out if death is from suicide.

Some financial institutions offer policies called accidental death cover, which covers you in the event of death from accidental injury. As only a small percentage of deaths are from accidents, these aren't really worth the money.

Our verdict – term (life) insurance is a must for anyone with dependants.

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Income Protection (Disability) Insurance

Life insurance industry statistics tell us that at the age of 35 you are 10 times more likely to be disabled from an illness or injury than you are to die from it.

How will you pay the bills? The mortgage repayments? School fees, etc etc?

You may get a limited amount of sick pay from your employer if you're salaried, but it won't last long. There's always workers' compensation, but that only covers you for work-related injuries – a small percentage of causes of disability.

But if you have an income protection policy it will pay up to 75 per cent of all income (salary/wages plus super plus any other benefits) allowing you to maintain your lifestyle pretty much intact, and to keep paying off the home mortgage and any other loans you may have.

The actual monthly income you are paid from the policy can be agreed on when you take the policy out (a so-called 'agreed value per month' policy). Or it can be calculated according to the income you're earning at the time when you make the claim. These so-called 'indemnity policies' are cheaper, but riskier – if your income has fallen at the time you make a claim, you risk a much lower payout.

Income protection polices aren't quite as cheap as term/life policies. The cost as a rule-of-thumb is two per cent of annual salary. But that buys you a lot of cover.

Just like term cover, premiums are higher the older you get, if you smoke, if you're male and if you are in a risky occupation. There is usually a waiting period between claiming and getting your first payment – the longer the 'no claim' period, the cheaper the premium. The premiums are tax deductible, but the income stream paid out by the policy is taxed.

A word of warning about these policies – there is a lot of variation from policy to policy and the devil is in the detail.

Look carefully at the definition of disability. Some define you as disabled if you're unable to do the sort of work that you normally do. Others define it as being unable to do ANY sort of work. With the latter type of policy,

Some policies are guaranteed renewable. Others don't automatically renew, but will only renew at the insurer's discretion. If you develop a condition that could lead to a later claim the insurer may choose not to renew the policy.

Our verdict – recommended for those with financial liabilities and dependants.

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Trauma Insurance

Otherwise known as 'crisis' or 'vital' cover, trauma insurance pays out a lump sum on the diagnosis of a range of about 30 nominated life-threatening conditions – like cancer, heart attack, stroke, heart bypass surgery, paralysis, and head trauma (but not for accidental death from injury). It's often bundled with term/life cover.

Trauma insurance is designed to pay the inevitable medical bills associated with a major illness, or fund a holiday, pay out a home mortgage, or allow the injured person to work part-time until retirement.

Things to watch out for: some policies have a narrow definition of what constitutes suffering from a particular condition. It may not be enough to have signs and symptoms of a heart attack – you may have to have certain changes in an electrocardiogram test, for example. The policy that covers the greatest range of conditions isn't necessarily the best.

Our verdict – optional.

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Where do I get it?

You can buy any or all of these insurance policies direct from the insurer or through an intermediary such as a broker or agent, who will advise you on which combination of policies and products are best suited to your needs.

Brokers are preferable to agents, as they are independent and have access to a greater range of products – insurance agents only deal with products from a limited range of insurers. Brokers charge a commission but they generally negotiate discounts from insurance companies, so in the end it costs no more to go through a broker than it is to buy direct from the insurer.