Most people know roughly what life insurance is: an insurance policy that pays out a lump sum if you die. But is there a catch? Are there times when the policy will and won’t pay out? And what’s the money actually for? Allow us to explain.

What does life insurance cover?

Insurance policies cover you in case a particular event happens. With life insurance, that event is your death. Life insurance covers you if you die – and this will be referred to as the death benefit in the insurer’s policy documents.

The difference between life insurance and other insurance policies is that it’s not you who’ll claim the money – because, as difficult as it is to think about, you won’t be here anymore. It’s claimed by your partner or children, or whoever you’ve chosen to receive it.

In some life insurance policies, you’re also covered if you’re diagnosed with a terminal illness. Insurers call this terminal illness benefit. This simply means that instead of being paid out in the event of your death, the lump sum is paid out when you receive a terminal diagnosis. Insurers usually define this as a doctor saying you have a year or less to live.

When does life insurance pay out?

Life insurance pays out if you die while you’re insured. For term life insurance, this means if you die within your policy term. For whole-of-life insurance, it means whenever you die (as this kind of policy covers you for your whole life, however long you live). You can read more in our guide to different life insurance policy types.

If your life insurance policy has terminal illness benefit, it’ll pay out early if you’ve been diagnosed with a terminal illness. To claim, you’ll need to have been given a year or less to live. In this context, the money left by life insurance can provide a financial cushion while you adjust to your terminal condition. As well as providing for your loved ones as they embark on a future without you.

When doesn’t life insurance pay out?

In short: life insurance pays out if you die while you’re insured and you’re honest about your health during the application process. Insurers typically pay out over 90% of life insurance claims – so, for the most part, it pays out. But to be really clear, there are some instances in which life insurance won’t pay out:

  • If you cancel your policy – as you’ll no longer be insured
  • If you invalidate your policy – by missing monthly payments, for example
  • If you die outside of your policy term – when you have term life cover
  • If you meet an exclusion – e.g. death by suicide within the first year
  • If you’re dishonest about your health when you apply

What’s a life insurance payout for?

This depends on your circumstances and the financial dependents you’ll leave behind. In general, a life insurance lump sum is used to make sure your surviving partner and children, if you have them, can cope financially without you and your income. It's there to cover any financial shortfall you’d leave them with, so they’d be able to pay for all the essentials and, ideally, maintain their lifestyle. The money’s often intended for things like:

  • Paying off the mortgage
  • Paying the rent
  • Paying for essential bills and living costs
  • Maintaining the family lifestyle
  • Paying for your funeral
  • Paying off any other debts
What would you need life insurance to cover? Let's work it out. Select your age to start:
  • Life insurance covers the event of your death
  • Some policies pay out early if you’re diagnosed with a terminal illness
  • It pays out if you die while you’re insured and you were honest about your health when you applied
  • It won’t pay out if you cancel your policy or die while you’re not insured, and might not if you meet an exclusion
  • A life insurance payout can make up for the financial shortfall you’d leave your partner and/or children if you die – helping them cover bills and maintain their lifestyle
What is life insurance?
An insurance policy that pays out a tax-free lump sum to your partner or family if you die. It’s designed to make sure your loved ones would be financially secure without you and your income.
Who needs life insurance?
Anyone who has financial dependents. In other words: other people who rely on your income. If you have a partner or children who’d be financially affected by you dying, you should consider having some life insurance in place.
How much does life insurance cost?
Life insurance is often very affordable, but the cost differs per person. This is because it depends on the cover you buy and how much of a risk you are to insure (based on your age, health and lifestyle). It’s cheapest when you’re young, fit and healthy.
Does life insurance always pay out?
Life insurance will pay out if you die while you’re insured and you were honest about your health when you applied. It won’t pay out if you die after your policy runs out or you cancel your policy – and might not if you meet an exclusion (e.g. many insurers exclude death by suicide within the first year of taking out the policy).
Is it easy to claim?
Claiming on a life insurance policy is straightforward – your partner or family simply claim directly with your insurance company. Making sure they know about your policy and have the details in case the worst happens can be helpful.