Do I Need Life Insurance?

While it’s often the policy given the least amount of thought, the uncomfortable truth is that everyone can benefit from life insurance.

Despite New Zealanders having access to subsidised health care and accident compensation (ACC), families can still face significant financial hardship after a loved one dies.

In some instances, if a person with dependents died from an injury that is covered by ACC, ACC can help to cover the funeral expenses, help with childcare costs and loss of income. There are also bereavement benefits available from Work and Income (WINZ). However, neither of these sources of financial aid provide the security of a life insurance policy. Depending on the situation, you may not qualify, and even if you do, it may not be enough.

While life insurance may not feel entirely necessary if you are young, single and healthy, the older you get and the more dependents you have, the more important life insurance becomes.

However, even with no dependents, in the event of a terminal illness, life insurance could mean the difference between precious time spent with loved ones or ticking off the bucket list, versus financial struggles and stress.

Lastly, some people choose to take out life insurance policies to leave behind a legacy, for example by donating to a trust or charity.

How Much Life Insurance Should I Get?

How much you cover yourself for is completely up to you. But bear in mind that the greater your cover, the greater your premiums will be. So, assuming you can afford to comfortably pay the premiums, the amount will depend on who it is set up to benefit.

At the very least, your life insurance should cover any outstanding debts, including your mortgage, and your funeral expenses.

If you would be leaving behind dependents such as children under the age of 18, or a partner who cannot work, your life insurance should be enough to comfortably support their living costs.

If you don’t have any dependents, then there is more flexibility in the amount that you choose. However, it should be enough to support your own living expenses for up to a year if you were to receive a terminal prognosis.

As an example, $500,000 is a common amount for middle-aged New Zealanders to choose for their life insurance policies. Younger policyholders may choose smaller amounts in the realm of $1 - 300,000 depending on their personal situation.

How Much Does Life Insurance Cost?

Life insurance premiums vary depending on age, gender and the amount that you have insured yourself for. Typically, younger people and females pay smaller premiums than older people and males.

However, your health status, weight, and whether you are a smoker, also affect your premiums. Insurance companies may also ask about your family history, hobbies and occupation.

The examples in the table below show approximate starting prices for non-smokers paying fortnightly premiums.

Types of Life Insurance: Yearly Renewable Term Vs. Level Life

The examples above are for Yearly Renewable Term (YRT) policies, also known as stepped cover. But what does that mean?

Most life insurance policies in New Zealand are YRT which means that your policy automatically renews each year. YRT policies are popular with young people because they are typically very affordable while you are young and with no underlying health conditions. However, the premiums for YRT policies increase as you age, often making it the more expensive option in the long run.

So what’s the alternative?

The other option for life insurance policy structure in New Zealand is Level Life Cover, or Level Term. With Level Life policies, the premiums remain fixed for a chosen period of time. While the premiums are often more expensive to begin with, over the course of your life, this may end up being the cheaper option.

Regardless of whether you go with YRT or Level Life, as with any type of insurance, different policies come with slightly different conditions.

For example, some policies provide financial advice for beneficiaries, while others include different forms of health-related insurance, such as trauma coverage, within the same policy (more on these later). Furthermore, while some providers do allow for early payouts in the case of a terminal illness, some don’t.

So, it pays to read the fine print carefully and know what you’re buying.

What About Tax?

We mentioned earlier that life insurance payouts are tax-free. This is true for all policies, provided the recipient is a person and not a trust or charity.

When Should I Get Life Insurance?

The short answer to this question is as soon as possible!

The longer you wait, the more expensive your premiums will be. This is because, as you get older, the number of pre-existing conditions that you have will likely start to increase, making you a more risky person to insure.

This is when exclusions and loadings come into play.

What Are Insurance Exclusions and Loadings?

An insurance company might decide that it doesn’t want to cover you for death as a result of a particular pre-existing condition. This pre-existing condition would then be excluded from your policy.

On the other hand, the insurance company may allow for a particular pre-existing condition to be included in the policy, but at the cost of a higher premium.

Sorting out your life insurance earlier before you develop pre-existing conditions keeps your premiums smaller.

On a similar note, a good MO is to review your life insurance every time your circumstances change.

For example, you’ve just bought a house, got married, or had a baby. It’s time to start thinking about how your life insurance policy should reflect these changes. Each of these scenarios would likely warrant an increase in coverage.

On the other hand, if your kids have just moved out and you’ve paid off your mortgage, you can probably safely decrease your coverage and save some money on premiums.

How to Get Life Insurance

Purchasing life insurance is easy. Usually, New Zealanders purchase life insurance via an adviser who can make individualised recommendations. Advisers commonly provide their services free of charge and can guide you towards the right kind of policy.

In fact, many insurance providers only sell policies through advisers, and while some sell directly to the public (eg. AA Life, Cigna and Pinnacle Life), their policies are likely to be simpler without some of the bells and whistles than one an adviser can set you up with.

Here at Quashed, we can help you out with whichever route you decide to take.

Our self-service Market Scan scan provides multiple online options in just a few clicks. They are easy to compare so that you can make the right choice for you.

Other Insurance Options

These types of insurance can usually be added to life insurance policies as a bundle, and can sometimes be purchased separately.

• Trauma Insurance (a.k.a. ‘critical illness insurance’)

Trauma insurance provides a lump sum payment in the event of a non-terminal diagnosis or event, such as cancer, heart attack, stroke, Parkinson’s disease, loss of sight or hearing, or loss of a limb. The money can be utilised however you see fit, for example for help around the house, private healthcare, general living costs, or a holiday.

• Total Permanent Disability (a.k.a. complete disablement)

Total permanent disability is similar to trauma insurance but for permanent situations, such as impairment from an accident or degenerative illness. In addition to the lump sum, there may be provisions for modifications to be made to your home or car.

• Income Protection

Income protection covers you for events that may prevent you from working, or working in your own profession. You may be able to receive up to 75% of your usual income until you are able to continue working, or until you retire. However, this amount may vary depending on whether you are getting other assistance, such as ACC payments.

• Redundancy Insurance

Redundancy insurance usually provides you with a proportion of your lost income for a given time period after you are made redundant, such as three or six months. Often people with redundancy insurance can receive their payout on top of the redundancy payment from their employer. However, it is only available to people with permanent, full-time contracts, not temporary, part-time or contracted work.

• Mortgage Insurance

Mortgage insurance can be claimed to cover mortgage payments for a given time period to ensure that you don’t lose your home.

Key Life Insurance Terms

• Sum Assured

The amount that you choose to insure yourself for, and the amount that would be paid out in the event of your death. This is as opposed to ‘sum insured’, which refers to the upper limit of coverage in other forms of insurance, but is not always the specific amount you will receive.

• Wait Period

The length of time a policy has to be in place before coverage kicks in.

• Exclusion

A provision in your policy that stipulates when 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. Provided 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 you smoke, dangerous sports and activities and your occupation.

You can find out more about life insurance here.