The difference between life insurance and health insurance

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22 June 2023

Smiling woman in wheelchair, in urban outdoor space.

When protecting ourselves and our loved ones, life and health insurance play essential roles in providing financial security. So, it makes sense that these two types of insurance are often confused with one another.

Both life and health insurance can reduce the financial burden if something doesn't go to plan. However, they do it in different ways. While health insurance can help cover out-of-pocket expenses related to medical conditions, life insurance can help manage other costs if you die, suffer a significant critical illness or are injured and can't work.

Understanding the differences between these two types of insurance is essential for making informed decisions about your cover needs. So, let's look at the difference between life and health insurance in Australia.

Life insurance: protecting the future

Generally, Life insurance is a contract between an individual and an insurance company, where the insurer promises to financially support an insured person or their loved ones if they cannot work due to an injury or illness and become temporarily or permanently disabled or die.

The financial benefits they receive from the insurer in these instances can be used to pay anything from daily living expenses, mortgage, school fees, and home modifications to out-of-pocket medical expenses.

There are different types of cover within life insurance:

Life Cover

  • Pays your nominated beneficiaries a lump sum if you die. Often, this type of cover also provides cover for terminal illness if you are diagnosed with a terminal medical condition. This payment is often used to cope with ongoing financial commitments like mortgage repayments.

Total and Permanent Disability

  • Pays you a lump sum if you suffer a disability and are unlikely to work again. The amount will depend on the type and severity of your condition. You might use this payment to replace lost income, cover everyday expenses, pay for a carer or make modifications to your home or car.

Critical Illness

  • Pays you a lump sum if you suffer a specified critical illness. You might use this payment for out-of-pocket medical expenses, income to allow your partner to take time out of work to care for you, cover short term cost of living and mortgage commitments or rehabilitation if health insurance doesn't cover these expenses fully. It’s important to know that Critical Illness cover is not available through life insurance inside superannuation.

Income Protection

  • Pays you a monthly benefit if you become injured or ill and can't work. You might use this payment to help you keep up with recurring expenses like mortgage repayments, grocery, or utility bills. Many policies also include ancillary features such as a rehabilitation expense to support recovery.

Health insurance: access to quality healthcare

Health insurance on the other hand, is designed to help cover the cost of medical treatments and services. It provides individuals access to private healthcare facilities and services not covered by the public health system, Medicare. Health insurance in Australia allows policyholders to choose their preferred doctors, hospitals, and treatment options, providing greater flexibility and control over their healthcare decisions and timing of their treatment.

Depending on the policy, health insurance is typically broken into Hospital Cover and Extras. It can cover a range of services, such as hospitalisation, prescription medications, and ancillary services like dental, optical, and physiotherapy.

Just like life insurance, health insurance policies often include waiting periods, exclusions, and limitations, so reviewing the terms and conditions is crucial before selecting a policy.

Key differences

While both life and health insurance aim to provide financial security, they differ in several key aspects:

Feature Life insurance Health insurance
Cover focus Focuses on providing financial support to the insured person and their loved ones if they die or cannot work due to injury or illness. Focuses on providing financial support to the insured person and their loved ones if they die or cannot work due to injury or illness.
Payment structure Typically provide a lump sum payment or periodic payments due to death or disability. Reimburse the policyholder for eligible hospital and/or medical expenses up to the predetermined limits.
Purpose Ensures that the insured person and their loved ones are financially secure if they die, are injured, or become ill. Aims to reduce the out-of-pocket expenses related to medical care and provide access to private healthcare facilities.
Tax benefits Income Protection premiums are generally tax deductible. You would need to speak to a tax professional to check eligibility. You may also receive financial benefit at tax time from having health insurance through what is known as the Medicare levy.

How life and health insurance can work together

Let's look at a hypothetical example to better understand how life and health insurance can work together.

Talia is a 39-year-old kindergarten teacher with two school-age children.

On a hike with her friends, Talia loses her footing and falls, severely damaging her back, torso, and legs. Her injuries are so severe that she is in intensive care for three weeks.

She has top-level private health coverage and is covered for any out-of-pocket expenses for her hospital stay. She can choose her surgeon and has access to a private room in the hospital.

After leaving the hospital, her health insurance provider puts her in touch with an occupational therapist and physiotherapist.

Unfortunately, due to the nature of her job, her injuries mean she can't work for 18 months. As Talia also has Income Protection insurance from MLC Life Insurance, she lodges a claim. It is then assessed under the terms of her insurance policy and approved for benefit payment.

After serving her waiting period, she receives a monthly benefit, which means she can pay for her children's school fees, mortgage repayments or rent, utilities, and grocery bills.

As an MLC Life Insurance customer, Talia can also access an extensive list of allied health specialists through Vivo. Vivo is MLC Life Insurance's health, wellness, and recovery program. Through the rehabilitation specialist offered through Vivo, Talia received a comprehensive plan to get her back on her feet as soon as possible.


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