As you learn more about life insurance, there are a few common terms you’ll come across exclusions, loadings and indexing. It’s important to understand what they mean and how they can affect your life insurance cover.
| Life insurance exclusions are circumstances that are not covered by your life insurance policy, which means you won’t be able to make a claim for these events. |
| Example: If you have a pre-existing medical condition before you purchase the policy (i.e. a back injury) it may be excluded from your policy, meaning you won’t be able to make an income protection or TPD claim as a result of that condition. |
| Life insurance loadings are an additional premium you pay for your cover if there are increased risks of a claim. |
| Example: You have a history of a medical illness or have an increased risk factor, such as smoking. |
| Life insurance indexation is the process in which your benefit amount increases over time. When indexation applies to your policy, it will change in line with typically either a set percentage or inflation, in order to keep up with the cost of living. Your premium will also increase to account for the increase in your benefit amount. |
| Example: Cover taken out in your 30s is indexed, so your level of cover can still be relevant to the cost of living in your 50s. |
Exclusions, loadings, indexing and all other terms and conditions of a life insurance policy can be found in the relevant Product Disclosure Statement (PDS).
When it comes to which circumstances are excluded from life insurance, exclusions will vary between policies and insurance companies. However, some common exclusions include the following:
Some of the above exclusions are referred to as general life insurance exclusions and typically apply to everyone taking out a life insurance policy. General exclusions may include suicide and self-harm, illegal activity, a terminal illness at the time you commence your policy and behaving unwisely.
Specific life insurance exclusions are unique to your situation and will usually differ between policyholders based on their different circumstances. A risky lifestyle filled with dangerous activities, bad health, high-risk travel plans and a dangerous occupation are all examples of specific exclusions.
A loading fee is a percentage increase in price on standard life insurance premium rates. A loading fee is based on your level of risk (i.e. if there’s an increased risk of you making a claim in the future due to certain circumstances and situations).
These loadings can affect your life insurance policy by increasing the cost of your premium. Common examples of life insurance premium loadings include:
Your loading fee and the criteria for life insurance loadings will differ depending on your insurer.
Life insurance claims that are the result of something specifically excluded by your policy are likely to be rejected by your insurer, and your beneficiaries could be left without a successful claim as a result. This is why you must read and understand the terms and conditions in your policy documents.
You can generally opt-out of indexation on your life insurance if it was applied as standard during the application process. Avoiding indexation may ease the rise in your life insurance premiums, but your insurance benefit will remain the same and as a result may not keep up with the cost of living over time.
If you don’t think you’ll require an increase to your amount of cover over time, you can get in touch with your life insurer and discuss indexation with them personally.
In some cases, you can ask your insurer to review a particular premium loading or exclusion if your lifestyle or circumstances – and associated level of risk – have changed.
For example, you might be able to have your loadings or exclusions reviewed and changed if you’ve:
Having your cover reviewed could make a difference to the price you pay and what you’ll be able to make a claim on.
The loadings calculated on life insurance premiums differ between insurance providers, not to mention they will also vary based on the insured individual. As a life insurance customer, you’re bound by a duty to take reasonable care not to make a misrepresentation to your insurance provider about your lifestyle and health at the time of application, as this may impact your claim.
Your insurer will then use the information provided on your application form to determine whether you’ll incur any loading.
Indexed life insurance is either calculated as a fixed percentage or in line with changes to the Consumer Price Index (CPI), which measures the rate of inflation. The CPI is calculated against the changing price of goods and services in Australia, making it an appropriate way for reassessing life insurance payouts.
Typically, an insurance policy will define indexation as a fixed rate (e.g., 5%) or the CPI inflation rate, whichever is greater.
Each policy differs in the indexation they use so you should read the PDS which will set out the indexation rules.
When you choose to add indexation as a feature on your life insurance, your premiums and lump sum benefit amount could increase in both price and value, either at a fixed rate per year (e.g. 5%) or at the rate of inflation. This gives you the option of increasing your cover amount on an annual basis to combat the effects of inflation.
The indexation amount is set by the insurer, however the “index” that indexation references is usually the Consumer Price Index (CPI), which measures the cost of living in Australia. So if the cost of living increases by 3% in a given year, an indexed insurance benefit will also increase by 3% so that you, or your beneficiary, don’t lose the purchasing power of your money when the cost of living increases.
For example, if you’re insured for $100,000 and your life insurance policy is indexed at an inflation rate of 4% for the year, your sum insured will increase to $104,000 the following year. If the inflation rate is consistently at 4%, your sum insured will increase by 4% year after year.
Over the long term, this can make a substantial difference in your payout; however, your increased cover amount will typically come with a higher premium. The graph below shows an example of what this might look like.
When comparing life insurance through our free comparison service, you’ll be able to see exclusions and indexation from available policies side-by-side.
It’s one of the easiest ways to review multiple options at once, so you can make an informed choice when you buy. You can also review and compare different types of life insurance policies, such as trauma insurance, TPD cover and term life insurance.
If you see a policy you like, the next step is to speak with one of our specialists to assist you in making a choice based on your insurance needs.
