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Life insurance jargon busters to help you choose the right cover

30 June 2022 dot 5 mins read

Baffled by the jargon and technical terms around life insurance? We've got you covered!

Taking out a life insurance policy is a great step to take in providing you and your loved ones protection in case the worst happens. Naturally, it’s important to understand what you’re getting and how it works - which unfortunately means wading through a lot of jargon and unfamiliar terms.
 
We’re here to help with an alphabetical guide to common life insurance terms.
 
You’ll find your insurer will also have a list of life insurance terms with their own definitions. They are usually found towards the back of the Product Disclosure Statement (PDS). If you’re taking out life insurance, it’s important you read these definitions too.

Your ability to perform basics tasks by yourself so you can live independently; e.g., feed, dress, bathe, go to the toilet, and get in and out of bed and a chair. This is one of the key assessments applying to Total and Permanent Disability claims.

Where the benefit (insured) amount increases by the Consumer Price Index (CPI) or an agreed percentage amount each year. This applies to the insured amount before claim.
 
This is not to be confused with indexation upon claim for IP payments, which applies after claim when payments are made in instalments and may increase in line with CPI over time if that option is selected.

For income protection policies, the maximum period the insured monthly benefit will be paid; e.g., two years, five years or to age 65.

An event or medical condition that is not covered by the policy and therefore won’t receive a benefit payment. For example pre-existing medical conditions, a hazardous occupation or participating in a dangerous leisure activity. Depending on the policy and provider, these may be specified when you are offered cover or applied more generally.

Insurance designed to replace your income with a monthly payment of up to 70% of your income if you are unable to work due to injury or illness.

If your premium hasn’t been paid for a specified period of time (in other words, it lapses), then your cover will end and you’ll need to apply for a new policy.

Level premiums generally start higher than stepped premiums but don’t go up each year because of your age. Level premiums are designed to be held over a long period of time. However, the amount of Level premiums you pay over the life of your policy can sometimes be more than what you’d pay for Stepped premiums.
 
It must be noted that Level premiums are not fixed. There are several reasons for premiums to change, such as: if benefit indexation is applied, increasing your cover, then your premiums will increase accordingly; the premium rates upon which premiums are based for a group of policies may change.
 
In addition, depending on your policy, Level premiums may change to Stepped on the policy anniversary before your 65th or 70th birthday if your cover continues after this date.

An increase in premiums to reflect the higher risk factors that statistically lead to a higher likelihood of claim. For example, due to health, occupation or pastimes.

Failing to take reasonable care not to make a misrepresentation when disclosing relevant information during the application may mean your policy will be void and claims denied. A misrepresentation is a false answer, an answer that is only partially true, or an answer which does not fairly reflect the truth.

The document you receive on acceptance of cover that contains the specific details of your policy, including any special conditions, such as loadings or exclusions. The policy schedule and PDS make up your policy with your insurer.

The document which contains all the terms and conditions of the life insurance cover. Along with the policy schedule, the PDS makes up your policy with your insurer.

You can choose for your premium to be based on the current premium rate applicable for your age at each policy anniversary. This means that the actual premium payable by you will increase each year. Compared to level premiums, stepped premiums will be less in the earlier years and more in the later years. Similarly, increases to the sum insured (e.g. via benefit indexation) will increase your premiums, as would any adjustments to the premium rates applied by the insurer.

The amount of money your life is insured for.

Insurance designed to pay a lump sum if you become seriously ill or injured and can’t work again. The finer details may differ between insurers, so please check the PDS so you know exactly what you’re covered for.

Insurance designed to pay a one-off lump sum if you’re diagnosed with one of the medical conditions listed in your policy.

The process an insurer goes through to assess how likely a policy holder is to make a claim. The outcome of the assessment might mean a loading or exclusion is applied or the application is declined if the risk factor is too high.

For income protection, the period of time you have nominated to wait while sick or injured before you can receive a payment. It is also worth noting that insurers often make payments at the end of the month, which should be taken into consideration when setting waiting periods.

Need advice?

Talking to a financial planner can help you unpack the jargon, understand your situation and make confident financial decisions (big or small) so you can get the most out of life.
Disclaimer:
Copyright © 2022 AIA Financial Services Pty Limited (ABN 68 008 540 252, AFSL 231109), trading as AIA Financial Wellbeing. All rights reserved. This information is current at the date of this publication and is subject to change. This provides general information only, without taking into account factors like the objectives, financial situation, needs or personal circumstances of any individual and is not intended to be financial, legal, tax, health, medical, nutritional or other advice. Before acting on the information in this publication, individuals should consider its appropriateness having regard to such factors.

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