You want to protect your family’s future, but life insurance feels complicated. You’ve heard terms like “sum insured,” “beneficiaries,” and “waiting periods,” but you’re not sure what they mean or how much coverage you actually need.
Term life insurance Australia explained simply: it’s temporary coverage that pays your loved ones a lump sum if you die during the policy term. It’s the most affordable type of life insurance available to Australians, and understanding how it works can help you make the right choice without overpaying.
This guide breaks down how term life insurance payouts work, what you’ll pay in tax (or won’t), and how to choose a policy that fits your budget and protects your family.
What Is Term Life Insurance in Australia?
Term life insurance provides coverage for a specific period—usually 10, 20, or 30 years. If you die during that term, your beneficiaries receive a lump sum payment. If you outlive the term, the policy ends and you don’t get any money back.
This makes term life insurance different from permanent life insurance, which covers you for your entire life and often includes a savings component. Term policies are simpler and cost less because they only pay out if you die during the term.
Most Australians choose term life insurance because it’s affordable and matches their needs. You can set the term to cover the years when your family depends on your income most, like while you’re paying off a mortgage or raising children.
Sample Term Life Insurance Quotes
Here’s what term life insurance costs for a 35-year-old non-smoker in Sydney with $500,000 coverage:
- 10-year term: Approximately $30–$35 per month
- 20-year term: Approximately $45–$52 per month
- 30-year term: Approximately $68–$78 per month
These quotes vary based on your health, occupation, and the insurer you choose. The longer the term, the higher the monthly premium because there’s more chance you’ll make a claim.
Key difference: Term life insurance vs permanent life insurance
| Feature | Term Life Insurance | Permanent Life Insurance |
|---|---|---|
| Coverage period | Fixed term (10–30 years) | Lifetime |
| Premium cost | Lower | Higher |
| Cash value | None | Builds over time |
| Best for | Temporary protection | Long-term estate planning |
Related: [Types of life insurance Australia], [Do I need life insurance]
How Term Life Insurance Payouts Work in Australia
When you die, your nominated beneficiary files a claim with your insurer. The process usually takes 2–4 weeks, though complex cases may take longer.
Here’s how the claims process works:
- Your beneficiary contacts the insurer and requests a claim form
- They submit the required documents, including a death certificate, a completed claim form, and your policy details
- The insurer reviews the claim and may request medical records or additional information
- Once approved, the insurer pays the lump sum directly to your beneficiary’s bank account
Most claims are straightforward and pay out without issues. However, some circumstances can delay or prevent payment.
When Payouts May Be Delayed or Denied
Your insurer may delay or refuse to pay if:
- You didn’t disclose a pre-existing medical condition when applying
- You died during the policy’s waiting period (usually the first 13 months for suicide-related deaths)
- You stopped paying premiums, and your policy lapsed
- Your death resulted from an excluded activity listed in your Product Disclosure Statement (PDS)
ASIC’s MoneySmart website provides detailed guidance on making life insurance claims and what to expect during the process. Check their resources if you’re helping someone file a claim or want to understand your policy better.
Related: [Life insurance beneficiaries Australia], [Life insurance claims process]
Are Life Insurance Payouts Taxed in Australia?
Death benefits from term life insurance are generally tax-free in Australia. Your beneficiaries receive the full lump sum without paying income tax or capital gains tax on it.
This applies whether you hold your policy privately or through your superannuation fund. However, there’s an important exception you need to know about.
Tax on Super-Held Life Insurance Policies
If you hold your life insurance through super and your beneficiary is not a tax dependant, they may pay tax on the payout. The Australian Taxation Office (ATO) defines tax dependants as:
- Your spouse or de facto partner
- Your children under 18
- Anyone financially dependent on you
- Someone in an interdependent relationship with you
If your adult child (over 18 and financially independent) inherits your super-held life insurance, they could pay up to 32% tax on the benefit. This includes 17% tax on the taxable component plus 15% Medicare levy.
Example: You have a $500,000 life insurance policy through your super. If your 25-year-old son inherits it and he’s not financially dependent on you, he might pay around $160,000 in tax, receiving only $340,000.
To avoid this, you can:
- Hold your policy outside of super if your beneficiaries aren’t tax dependents
- Make a binding death benefit nomination to ensure the payout goes to a tax dependent first
- Review your beneficiary nominations regularly as your family situation changes
The ATO website has a detailed guide on life insurance taxation. Check their resources or speak with a financial adviser if you’re unsure about your situation.
Related: [Life insurance through super], [Tax on life insurance Australia]
Factors That Affect Your Term Life Insurance Cost
Your premium depends on several factors. Insurers assess your risk of making a claim and price your policy accordingly.
- Age: The older you are, the higher your premium. A 30-year-old pays significantly less than a 45-year-old for the same coverage because younger people have a lower risk of dying during the term.
- Health status: Your medical history affects your premium. Conditions like diabetes, high blood pressure, or a history of cancer can increase your cost. Some insurers decline coverage for serious pre-existing conditions.
- Smoking status: Smokers pay up to 80% more than non-smokers in Australia. If you quit smoking, you can often reduce your premium after 12 months of being smoke-free.
- Occupation: High-risk jobs like construction work, mining, or commercial fishing cost more to insure. Office workers and professionals typically pay lower premiums.
- Sum insured: The more coverage you buy, the higher your premium. A $1 million policy costs more than a $500,000 policy.
- Term length: Longer terms cost more because there’s a higher chance you’ll make a claim during the policy period.
- Policy features: Adding total and permanent disability (TPD) or trauma insurance to your policy increases the cost but provides broader protection.
Sample Premium Comparison
Here’s what a $500,000 term life insurance policy costs for different profiles in Sydney:
- 30-year-old non-smoker, office job: $28–$32/month (20-year term)
- 30-year-old smoker, office job: $48–$58/month (20-year term)
- 45-year-old non-smoker, office job: $65–$75/month (20-year term)
- 45-year-old non-smoker, construction worker: $85–$95/month (20-year term)
These are indicative quotes from Australian comparison sites like Canstar and iSelect. Your actual premium depends on your specific circumstances and the insurer you choose.
Related: [Life insurance for smokers Australia], [How much life insurance do I need]
How to Choose the Right Term Life Insurance Policy
Choosing the right policy means matching your coverage to your family’s needs and your budget. Follow these steps to make an informed decision.
Step 1: Calculate Your Coverage Needs
Work out how much money your family would need if you died tomorrow. Consider:
- Income replacement: How many years of income would your family need?
- Outstanding debts: Mortgage, car loans, credit cards
- Future expenses: School fees, university costs
- Funeral costs: Typically $10,000–$15,000 in Australia
Example: Mark is 35, earns $90,000 per year, and has two young children. He has a $400,000 mortgage and wants to cover 10 years of income. His calculation: ($90,000 × 10) + $400,000 + $15,000 = $1,315,000. He rounds up to $1.5 million coverage.
ASIC’s Life Insurance Calculator helps you estimate your coverage needs based on your personal situation.
Step 2: Decide on Your Term Length
Match your term to when your dependants need financial protection most. Common scenarios:
- Young children: 20–25-year term (until they finish university)
- Teenagers: 10–15 years (until they’re financially independent)
- Large mortgage: Term matching your loan period
- No dependants: Shorter term or reconsider if you need coverage at all
Step 3: Compare Quotes from Multiple Insurers
Get at least three quotes from different insurers. Use comparison websites or speak with a financial adviser. Check that each quote includes:
- The same sum insured and term length
- Similar waiting periods and exclusions
- Clear premium structure (stepped vs level premiums)
Step 4: Read the Product Disclosure Statement
Your PDS explains what’s covered and what’s not. Pay attention to:
- Exclusions: Activities or circumstances that void your coverage
- Waiting periods: Time before certain benefits begin
- Definition of death: Some policies only pay for death, not terminal illness
- Premium increases: How and when your premium changes
Step 5: Check the Insurer’s Reputation
Choose an APRA-regulated insurer with a strong financial rating. Check their claim approval rate and customer service reputation. The Financial Services Council publishes annual life insurance statistics showing claim approval rates by insurer.
Checklist for choosing term life insurance:
- Calculate coverage needs using ASIC’s calculator
- Determine the appropriate term length for your situation
- Compare quotes from at least three insurers
- Read the PDS for exclusions and waiting periods
- Verify the insurer is APRA-regulated
- Consider adding TPD or trauma coverage
- Review beneficiary nominations annually
Related: [Life insurance calculator Australia], [Comparing life insurance quotes]
Common Mistakes to Avoid When Buying Term Life Insurance
First-time buyers often make avoidable mistakes that can leave their families underprotected or facing claim rejections.
1. Underinsuring your coverage: Many Australians buy too little coverage to save on premiums. If your family needs $800,000 to maintain their lifestyle but you only buy $300,000, they’ll face financial hardship. ASIC research shows that many Australian families are significantly underinsured, with the average gap between needed and actual coverage exceeding $500,000.
2. Choosing too short a term: Your policy ends when the term expires. If you choose a 10-year term but your children need support for 15 years, you’ll have to buy new coverage later at a higher cost (because you’ll be older).
3. Not disclosing health issues: You must tell your insurer about all pre-existing conditions when applying. If you don’t disclose and later make a claim, your insurer can refuse to pay. This is the most common reason for claim disputes in Australia.
4. Ignoring indexation options: Inflation reduces your coverage value over time. A $500,000 policy today might only have the buying power of $350,000 in 20 years. Choose a policy with automatic indexation to maintain your coverage value.
5. Buying through super without understanding tax implications: Super-held insurance is convenient and cheap, but your adult children may pay significant tax on the payout if they’re not financially dependent on you. Review whether holding your policy privately makes more sense for your family.
6. Not reviewing your policy regularly: Your coverage needs change as your life changes. Review your policy annually and update it when you:
- Get married or divorced
- Have children
- Buy a property
- Change jobs
- Pay off major debts
FAQs
Can I increase or decrease my term life insurance coverage later?
Yes, many insurers let you adjust coverage after major life changes like marriage or having a child.
What happens if I stop paying my term life insurance premiums?
Your policy will lapse after a short grace period, ending your coverage.
Can I have more than one term life insurance policy?
Yes, you can hold multiple policies, but ensure the total coverage fits your needs.
Does term life insurance cover death overseas?
Usually yes, though exclusions may apply in high-risk countries or war zones.
Can I convert my term life insurance to permanent coverage later?
Some insurers allow conversion to lifetime cover without a new medical exam.
Ready to Protect Your Family?
Term life insurance offers affordable protection for your family during the years they depend on your income most. Payouts are usually tax-free, and choosing the right policy means calculating your coverage needs, comparing quotes, and reading the fine print.
Start by using ASIC’s Life Insurance Calculator to estimate how much coverage you need. Then compare quotes from at least three APRA-regulated insurers. Review your policy annually to ensure it still matches your family’s needs.
If you have a mortgage, you might also want to consider income protection insurance alongside your term life policy. Check out our guide on [life insurance vs income protection] to understand which option works best for your situation.
