What is life insurance, and why should you care?
Life insurance is a way of making sure your family is taken care of - it essentially gives your beneficiaries a sum of money, set by you, after you pass away. If you are diagnosed with a terminal illness, you may be able to access some of this money yourself when you have a certain amount of time left to live (often a year).
Most New Zealanders choose to get an adviser for their life insurance, for advice and recommendations tailored to their personal circumstances. It is possible to go directly to the insurer to arrange your cover, or to go through a bank: however, if you choose either of these options, the advice you get will not be as comprehensive. If you’re thinking about life insurance and want to discuss your options with an expert, you can schedule a free chat with an adviser through Quashed | Be the boss of your insurance.
This type of insurance is frequently offered along with other forms of cover you and your family can benefit from in your lifetime. These options are geared towards supporting you through life-changing accidents or illnesses that prevent you from functioning to your full capacity, either temporarily or permanently.
Why should you take out life insurance?
New Zealand's healthcare system is subsidised and is accessible to everyone, as is our Accident Corporation Compensation system. However, there are some situations where the financial needs of families aren't fully captured - for instance when a parent falls seriously ill for a long period of time, or passes away, leaving dependent children.
It is uncomfortable to think about, but some families do face hardship following the death of a parent. Sadly, some terminally ill parents end up appealing for help from strangers, for instance via Givealittle or other fundraising campaigns, to support their family after they have gone.
When you take out life insurance you can choose the amount you want to be insured for, and in making this decision your economic position, and the price of your premiums, is something you need to factor into account. At a minimum it's recommended your loved ones should be able to pay your debts, the remainder of your mortgage, and your funeral expenses. If you have people depending on you, such as young children or a partner who cannot work, the amount you insure yourself for will clearly be much higher than if you have no dependents.
Different types of life insurance
If you want to take out a new life insurance policy in New Zealand, term life insurance, which covers you for a period of time only, is the only form of life insurance available. In the past more expensive “whole of life policies” were also offered, and some are still in force.
Look out for life insurance policies offering special provisions regarding terminal illness, allowing you to get a portion of the payout in advance. Under some policies, you may also be able to get a larger sum if something happens, for instance if you get married or have a child or take out a home loan. There are also policies which include financial advice for your beneficiaries.
Insurance options to accompany your life insurance
These forms of insurance are sometimes offered in a “bundle” with life insurance – however sometimes you can also take out this type of cover without having life insurance first.
Trauma insurance (also known as "critical illness" insurance") covers you against certain conditions which will be defined by your policy. Common examples are cancer, stroke, heart attack, paralysis and Parkinson’s disease. Loss of function (such as your ability to see or hear) is covered in this type of insurance, as is the loss of a limb. Trauma insurance is not the same as health insurance, and generally speaking you can spend the amount you receive any way you like, whether that's by getting help in your home, paying for private healthcare or rehabilitation, or putting it towards general household expenses - or even a holiday when you recover.
Total permanent disability (also known as complete disablement) is designed for situations that are permanent rather than temporary, including impairment from an accident and degenerative illness. In addition to a lump sum, under a TPD policy you might be able to claim a specified amount of money to modify your house or car to make your situation easier, or to pay for counselling to help you deal with your situation. Some policies make provision for partial permanent disability.
Income protection applies to people who are prevented from working altogether or working in their own profession due to illness or injury: you can get payouts up to 75% of what your pay would be if you were working. You will be covered until you are either able to work in your profession again, or until you retire. The amount you receive, however, may be impacted by whether or not you are also receiving other financial assistance, for instance through ACC. This form of insurance sometimes appeals to self-employed people: if you essentially are the business, your ability to function is the biggest asset you have.
Redundancy insurance payments usually provide you with a specified percentage of your lost income for a short period of time, often either three months or six months. Unfortunately, you usually cannot receive redundancy insurance if you work part-time or are a short-term contractor or self-employed - you might be better to focus on building an emergency savings fund or looking at other forms of insurance instead. On the positive side, if you are eligible for this form of insurance you may be able to accept a redundancy payment from your employer in addition to getting your insurance pay out.
As the name suggests, mortgage insurance provides a monthly payment to help you cover your mortgage repayments, so whatever happens you and your family can remain in your house and won't default on your home loan. A criticism that has been made of this form of insurance is that mortgage repayments alone are rarely enough to help someone who is struggling- however everyone's circumstances are different. Talk to your adviser about what the best options are for you.
Key life insurance terms
Here are some important terms you might come across when you’re thinking about life insurance and related policies:
Sum assured: Essentially the amount you insure your life for. In general insurance, policies refer to “sum insured”, which refers to the upper limit of coverage not the specific amount you will receive. For instance, you might insure your car for up to $10,000, but if it’s damaged you won’t receive all of that - unless the insurance provider accepts that $10,000 worth of damage was actually caused. When it comes to life insurance, the sum you have chosen is the sum that will be paid out.
Wait period: The length of time a policy has to be in place before coverage kicks in.
Payout period (also known as benefit period): The length of time in which you can receive payouts. For instance, if you have taken out income protection insurance, the policy should state the length of time: whether it’s a couple of years, or until retirement age.
Offset: For some types of insurance, for instance those relating to income protection, the amount you receive might be “offset” against other sources, such as ACC: the more money you receive from ACC, the less you will receive from your insurer.
Exclusion: A provision in your policy that stipulates you’re not covered in specified circumstances. Examples in a life insurance policy might be if you die while involved in a dangerous past-time, or if you die while breaking the law.
Renewal: When your insurance policy continues from one risk period to the next. Providing you have paid your premiums, renewal is usually automatic.
Premium loading: an increase in your premiums, due to an increased risk of death, injury or disablement.
Duty of disclosure: you’re required to disclose your medical history, your family’s medical history, age, gender, whether your smoke, dangerous sports and activities and your occupation.
When should I purchase life insurance?
Some people get their life insurance sorted in their early twenties or even their late teens, but many others wait a while longer. The most common motivation is starting a family.
The amount you pay will vary by gender, as well as age, and by lifestyle. Premiums can be "stepped" (increasing over time) or "level" for a period of time, for instance over 10 years. Here’s a rough estimate of what your monthly premiums might be if you choose a 10-year level premium structure (all of these examples are non-smokers):
25-year-old male, insured for $50,000: $8-15
25-year-old female, insured for $50,000: Around $9-$10
35-year-old male, insured for $200,000: $24-26
35-year-old female, insured for $200,000: $17-23
40-year-old male, insured for $500,000: $62-65
40-year-old female, insured for $500,000: $53-56
If you take out a policy in your 50s or 60s, you should expect to pay higher premiums than someone who begins at a younger age: and some insurers will have an age cut off when it comes to new life insurance policies. For instance, insurance provider Cigna will not insure anyone for new life cover over the age of 70.
Are there any hidden pitfalls?
It’s important to be completely honest when you talk to your insurance provider about your age, medical history, general health and whether you smoke, as all of these things are factored into your premiums. If you are found to have lied, your cover might be cancelled, and you might not be able to get your premiums back. In the worst-case scenario, your family may not receive the payout you thought they were entitled to after you pass away.
It’s helpful to know the major elements of your policy. Your insurance adviser should be able to help you understand what you’re covered for, and alert you to any exclusions your policy has. If you’re unhappy with the way your insurer is handling your policy, you can go through a complaints process with the provider itself. If this is unsuccessful your next option is your insurer’s Dispute Resolution Scheme. There are four of these operating in New Zealand, and anyone providing financial advice or financial services - including insurers - must belong to one.
Life insurance providers
It pays to shop around, because there are a lot of life insurance companies out there. Some companies, such as Pinnacle Life and Cigna Life, allow you to buy life insurance from them directly. Other companies providing life insurance are Southern Cross, State Insurance, AMI Insurance, AIA, Asteron Life, Fidelity, Partners Life Ltd, MAS (Medical Assurance Society), AA and SBS (Southland Building Society).
Banks which provide life insurance are BNZ, ANZ, Westpac, ASB, TSB and KiwiBank.
I’m interested in life insurance - what steps should I take?
Life insurance is sometimes offered via your employer, in addition to health insurance, so this might be something to look into. If you’re thinking about whether life insurance is a good idea for you right now, you can check out Quashed's brief guide to life insurance.
When you get life insurance policy, be sure to upload it: Quashed allows you to see all of your insurance policies in one place.
