How do buy-back options affect future life insurance claims?

Published 12 Mar 2018

Life insurance doesn't just pay out when the policyholder passes away. Most products have other features built in that provide financial support when people suffer critical illnesses, serious injuries or total and permanent disabilities (TPDs).

For instance, trauma cover offers payments when the policyholder suffers a heart attack, stroke or other type of debilitating health condition. But a successful claim will often reduce the overall cover provided under the overarching policy.

What is a buy-back policy?

Buy-back options are designed to restore the value of a life insurance policy after money has been paid out following a successful claim. An example of this would be if you had a bundled life insurance product worth $1 million, but you claimed $200,000 to cover the costs associated with a health scare.

A buy-back option would return the $200,000 to your life insurance policy after a specified timeframe. Without this feature, your family would only receive $800,000 if you died at a later date, which may not be enough cover their financial needs.

TPD and trauma buy-back options usually don't require an increase in premiums or underwriting following the claim, although each insurer's offerings are different.

Understandably, policies with these benefits can be attractive to people who want added security and peace of mind. However, there are drawbacks to consider.

What problems can arise with buy-back features?

Anyone who purchases a life insurance policy with buy-back options should carefully read the terms and conditions that apply.

Some buy-back clauses have exclusions that kick in once a successful claim is made. For example, if you suffer a heart attack and receive a payout, your policy may prevent you from claiming for heart-related illnesses in the future.

This can leave you underinsured or no coverage at all if your health deteriorates in the future. Given the substantial lump sums involved in life insurance payouts, you should check with your insurer if there are any caveats associated with buy-back features.

Life insurance is available as both a standalone product and through superannuation funds, so you may need to confirm how buy-back options work across multiple policies.

How to handle a rejected claim

A life insurance payout can mean the difference between financial security and struggling to cover your day-to-day expenses when something goes wrong.

That's why it's crucial to contact a no-win, no-fee superannuation disputes lawyer to ensure every avenue is explored when an insurer or super fund rejects your claim.

Gerard Malouf & Partners Superannuation Lawyers is here to help, so please contact us today.

  • NSW Offices
  • North Parramatta
  • Ballina
  • Baulkham Hills
  • Blacktown
  • Bondi Junction
  • Campbelltown
  • Chatswood
  • Erina
  • Rockdale
  • Liverpool
  • Miranda
  • Newcastle
  • Penrith
  • Ryde
  • Sydney
  • Tamworth
  • Wagga Wagga
  • Wollongong
  • Mudgee
  • Tweed Heads
  • VIC Offices
  • Melbourne
  • QLD Offices
  • Brisbane
  • Bundall
  • ACT Offices
  • Canberra City
Phone 1800 004 878 to book a free appointment