Life insurance: cover for the people who rely on you

"Life insurance" is an umbrella over four different products, and Moneysmart's guide defines each in a single clause. Life cover pays a lump sum — one single payment, not an ongoing one — when you die; it's the product most people mean by the phrase, and the money goes to the people you leave behind. Total and permanent disability (TPD) insurance also pays a lump sum, but while you're alive: it's there to help with rehabilitation and living costs when disability ends your working life rather than your life.

The other two answer a different question — not "what if I'm gone?" but "what if illness interrupts the income?". Trauma insurance covers you if you're diagnosed with a major illness. Income protection insurance pays some of your income — a portion, not all of it — if you can't work due to illness or injury; it's a stream rather than a lump, and it has its own page at Income protection. The four aren't rivals: they cover different failures, and a household can reasonably hold several or none.

Whichever type you're weighing, the product is defined by its paperwork. By law an insurer must give you a product disclosure statement (PDS) — the document that sets out what's covered and what's excluded, the waiting periods before you can claim, and how claims and complaints work; the last section of this page comes back to it. And you may already hold some of this cover without ever choosing it: most super funds offer life, TPD and income protection insurance for their members, which is where the third section picks up.

Moneysmart's sizing method is one subtraction. On one side, what your family would need: the mortgage paid out, credit cards and any other debts cleared, child care, school fees, and ongoing living expenses. On the other, what they'd receive anyway: your super, savings, the sale of any investments, your paid leave balance, and support from extended family. The difference between the two is the amount of cover to get.

Notice what the sum is not. It isn't a multiple of your salary, and it isn't a number an insurer suggests — it's built entirely from the people who depend on you. That cuts both ways: a parent with a big mortgage and young children can compute a genuinely large answer, while someone with no dependants and no debts can honestly compute a small one, or none. Needs-based thinking is permission to hold less cover as well as a reason to hold more.

It's also a snapshot, and every input moves with life. A new mortgage grows the debt line; a new child adds years of child care and school fees; a separation rewrites who relies on whom and what they'd receive. The method itself tells you when to redo it — whenever one of its inputs changes. And if the deciding is the hard part, Moneysmart's pointer is direct: if you need help working out whether you need life cover and how much, speak to a financial adviser.

Many people's first life insurance arrives without a decision: most super funds offer life, TPD and income protection insurance for their members, often as default cover — a standard package switched on by the fund rather than chosen by you. Moneysmart's assessment of the arrangement is even-handed: default insurance through super can be cheaper and easier than buying it directly, and the premiums are generally deducted from your super balance, so no bill ever lands in your inbox.

Both conveniences have a shadow. Default cover might not match your needs — it's set without knowing your mortgage, your children or anything else in the previous section's sum, so run that sum against whatever amount the fund gave you; if it falls short, you can increase your level of cover through your super fund. And premiums paid from the balance are invisible but not free: Moneysmart's caution is that paying this way reduces your retirement savings over time — every premium is money that would otherwise have stayed invested and compounding.

The rules of the cover live with the fund too — how it's set up, what it costs, and the conditions under which it runs or stops — and that machinery, including the ways cover through super can switch off, is walked through in Insurance in super. Moneysmart's advice before settling for the default is to treat it as one quote among several: compare the cover, cost and rules with policies outside super before deciding.

The PDS from the first section is where the surprises hide, which is exactly why the law requires it. It sets out what's covered and — the half people skip — what's excluded: the circumstances in which the policy doesn't pay. It lists the waiting periods — set stretches of time that must pass before you can make a claim. It covers what information you have to give the insurer, how the premiums work and can change, how to make a claim, and how to complain if one goes wrong. None of that is thrilling reading; all of it is what you actually bought.

The second trap is duplicate cover — paying for the same protection more than once. Moneysmart's warning is plain: check whether you already have life insurance through your super, and make sure you're not paying for insurance twice. Because default cover arrives automatically, the easiest way into this trap is holding more than one super fund — each can be quietly running its own default policy, each deducting its own premiums from a balance you'd rather kept growing.

The last trap is the quiet lapse. A policy only protects you while it's in force, and cover you stop paying for is cover that stops existing — whether that's a direct policy whose premiums stop, or cover inside super funded by a balance that's no longer being fed. The conditions under which super-held cover keeps running are fund rules, covered in Insurance in super; the general habit is the same either way. The worst moment to discover an exclusion, an unfinished waiting period or a lapsed policy is when someone is trying to claim on it — so read the fine print while nothing is wrong.