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The Difference Between Life Insurance vs Health Insurance

Russell Cain
Russell Cain Updated: 22 June 2020

As you start to budget for the new year and money feels tight, paying both a life and health insurance policy might be a bit difficult. If you’re tempted to cancel one or the other, instead consider downgrading your cover or searching for a cheaper insurance policy, because many Australians genuinely need both forms of protection.

Life and private health insurance each cover a different type of financial risk. Life insurance helps safeguard you and your family against the eventuality of death or diagnosis of a terminal illness by paying a lump sum amount to your nominated beneficiary(s), while private health insurance helps cover the cost of treatments and services received inside or outside the hospital.

Keep in mind that your insurance needs will change depending on your stage of life. So, carefully consider your unique requirements and health concerns (present and future), before deciding.

Do you need both life and health insurance?

Whether you need both health and life insurance depends on your specific requirements. If you want to avoid a medical or life-threatening emergency turning into a financial crisis, you generally ought to have both a health insurance and life insurance policy. Each one serves a specific purpose. One is not a replacement for the other, but instead, they serve a complementary function.

What is life insurance?

Life cover pays a lump sum benefit to your nominated beneficiary should you pass away or get diagnosed with a terminal illness.

Types of life insurance options

Death benefit

Provides a lump sum payment to your beneficiaries in the event of your death to help cover the cost of funeral arrangements, outstanding debts and mortgage payments.

Total and permanent disablement (TPD) cover

Pays a lump sum amount if you become totally and permanently disabled as per the insurer’s definition because of a sickness or accident.

Trauma insurance

Provides a once-off benefit amount should you suffer any of the critical illnesses listed in your product disclosure statement (PDS).

Income protection insurance

Pays a monthly benefit of up to 75% of your personal exertion income should you be unable to work for longer than your waiting period due to an illness or injury.

What is health insurance?

Generally, you purchase health insurance to cover any medical expenses that might have been paid out of pocket, for example, hospital accommodation in a private room, dental services and physiotherapy.

Types of health insurance plans

Hospital only

Covers some or all the costs for treatments and services received in a hospital. Your level of cover depends on your choice of Hospital plan: Gold, silver, bronze or basic.

Extras only

Pays for general treatments received outside of the hospital, for example, dental, physio and optical. The amount you can claim depends on your Extras option: Comprehensive, mid or basic.

Combined Hospital and Extras

Combines both Hospital and Extras cover into one plan to pay for medical treatments and services received in and out of the hospital.

Ambulance cover only

Select health funds offers a stand-alone ambulance plan that generally provides Australia-wide emergency ambulance services. Some funds might also include non-emergency services.

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Key differences between life insurance vs health insurance

Basis for comparison Life insurance Health insurance
Purpose The purpose of life insurance is to make sure your loved ones are financially taken care of should something happen to you. Private health insurance helps you cover the cost of treating illnesses, injuries and other medical conditions that Medicare does not cover.
Core benefit Provides a lump sum benefit to help your financial dependents cover funeral costs, mortgage payments, any potential loss of income and outstanding debts so they can continue their current lifestyle. Reduces out-of-pocket expenses not covered by Medicare, for example, ambulance services, IVF and optical. Provides you with more control over your choice of doctor, specialist and appointment times.
Length of policy Term life insurance is generally offered for a set period, usually up to your age 99, depending on the insurer. Entry ages differ from insurer to insurer. Health insurance benefit amounts generally reset at the start of each calendar year. However, the date might be dependent on the insurer.
Cost Your life insurance premium is dependent on many variables, including your age, gender, cover amount, premium type, your general health and smoking status. The cost of your health insurance plan is typically based on the type and level of cover you purchase, your excess amount and the state you live in.
Claims Generally, to claim on a life insurance policy, your beneficiary will need to contact the insurer and provide all relevant claims forms, including a valid death certificate. Usually, you can claim on the spot using HICAPS, or go online, claim via the insurer’s smartphone app or post your claim forms with invoices and receipts to the insurer.
Tax benefits Premiums are not tax deductible; however, the lump sum benefit is generally tax-free when paid to financially dependent beneficiaries. Private health insurance helps you avoid the Lifetime Health Cover (LHC) loading and Medicare Levy Surcharge (MLS).

Important; Before choosing one policy over the other consult with an insurance specialist to gain clarity on your insurance options.

Trauma cover vs health insurance

Trauma insurance pays you a lump sum benefit should you suffer one of the specified critical illnesses listed in your insurer’s PDS, for example, Alzheimer’s, heart attack and Multiple Sclerosis. This benefit can then be used to pay outstanding medical bills, replace lost income, or help you adapt to your new lifestyle.

Private health insurance is designed to take care of your immediate health concerns, for example, the ambulance fees, follow-up treatments, and medicines. It also allows you to choose your doctor, surgeon and hospital.

Choosing which insurance to buy

When deciding whether you should purchase life vs medical insurance (health cover) or both, you might want to consider your current stage of life:

Young and single

The younger you age, the cheaper your life insurance premiums will generally be. However, as a 20- and 30- something year old without dependents, you might want to consider income protection insurance, TPD and trauma cover.

Purchasing private health insurance before your 31st birthday will help you avoid the Lifetime Health Cover (LHC) loading that adds 2% to your premium each year you don’t have cover.


Couples purchasing life insurance can usually choose to have separate policies or a joint policy, each option has its pros and cons.

As a married or unmarried couple, you should carefully consider your individual requirements so you can find a policy that’s best suited to your partnership.

Raising a family

The primary purpose of life insurance is to protect your family against unforeseen financial hardship that might occur as a result of your sudden death.

Once you have children, private health insurance becomes even more critical. Most health funds in Australia offer family health insurance policy options.


When your kids are financially independent, and you’re nearing retirement, you might need to adapt your life insurance coverage to better match your new circumstances.

The older you get, the more likely you are to require a more comprehensive health insurance policy which might include coverage for hip and knee replacements, hearing aids and major dental.

Health and life insurance combined

Depending on what you can afford and your current stage of life, you might want to purchase both life and health insurance. Select insurer’s offer both insurance types and might even give you a discount when buying both from them.

However, it’s always best to first gather quotes and compare policies side by side to determine which policy type and level of cover best suit you and your family.

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