How does life insurance work?
Life insurance is a way to transfer your risk to an insurance company, in order to survive any unexpected financial losses. In exchange for a regular payment called premiums, the insurance company takes the risk from you, usually for a fixed term. If you die during this term, the policy will pay out a tax-free cash lump sum to your dependants.
Do I need life insurance?
Maybe someone told you to get life insurance – but how does life insurance work?
Your loved ones receive a taxfree one-off cash benefit – called the death benefit, if you die prematurely or if you are diagnosed with a terminal illness and expected to die within 12 months, you receive the payout.
The paradox with buying life insurance is we hope we never use it.
If I’m married?
Being married and raising a family, means you have a family that is relying on you to provide financial support and you need life insurance to help cover expenses after you die. Your premature death could result in extra child care or nanny costs.
Whether you are married or in a de facto relationship, you need life insurance even if you don’t have children.
Maybe you’ve bought a house together and co-signed a mortgage? Or some short term credit card debt.
The death benefit also gives your spouse a better standard of living and provides money for expenses such as medical bills and funeral or cremation costs.
…if I have children?
The cost of raising a child in New Zealand, for an average middle-income family, through to age 18 can be as much as $250,560.
Your children rely on you for accommodation, food, clothing, education and other day-to-day expenses.
If you die and unable to provide for your children, a life insurance cash payout can protect them financially and keep their lifestyle going.
…if I’m single?
Being young and single most likely means you will start a family soon or buying a home and taking out a mortgage. When your circumstances change you will need life insurance, at which point premiums could be higher due to changes in age and health.
Funeral or cremation costs can cost your loves ones $10,000 or more.
…if I’m retiring?
More and more kiwis rely on supplementing the New Zealand Superannuation with other income because the cost of living is so high.
A death benefit can pay for end of life costs but also boost the cash flow of your partner.
…if I’m an immigrant?
Getting life insurance as an immigrant in New Zealand may feel a little intimidating. Although you as an immigrant may need to provide some extra paperwork, copy of your visa or immigration documentation, generally you would be approved for life insurance. And if you have a resident visa the approval process is pretty straight forward and you would get similar rates as citizens.
Applying for life insurance as an Immigrant
You’ll need to provide documentation that you have a legal right to reside in New Zealand.
You may also need to prove that you are invested in staying in New Zealand, either by family, owning a business, owning property or by other means.
Most likely your insurance cover will have a territorial exclusion until you have a permanent visa.
…if I’m a business owner?
Life Insurance provides a simple answer to a very difficult question: What will be the financial impact when I die?
Why take out business life insurance?
Often business owners who buy life insurance to cover themselves do so using a buy-sell agreement.
For example, if three equal partners own a business and they want to protect themselves and their families, then they could each take out a life insurance policy on the other two partners. Then, if one of them dies, the policies would provide the remaining partners with the cash necessary to buy out the deceased partner’s share of the business. This type of arrangement is known as a “cross-purchase” buy-sell agreement because each partner is taking out a policy on all of the other partners.
As a business-owner, Life Insurance can be used as an automatic funding mechanism to buy out the interests of a business partner who has died or is diagnosed as likely to die within the next 12 months.
What does life insurance cover?
Life insurance pays out the death benefit for most causes of death including illness, accident, or natural causes.
The insurer may reduce or not pay the death benefit claim if it’s caused by suicide within the first 13 months, an intentional self-inflicted act or if it’s discovered the applicant has withheld substantial information that would have changed the offer of insurance.
How much life insurance do I need?
Our unique financial planning software takes into consideration any outstanding debt, assets, possible inheritance, KiwiSaver, end-of-life costs and future day-to-day expenses while having fixed life insurance cover in place simultanously until your longest financial obligations are over.
Our interactive graphs show your lifetime cash flow and current financial position. Not having enough cover in place might mean a budget surplus moves into deficit area. Or your family and loves ones will end up liable for your debt.
A good rule of thumb is 10-15 times your annual income.
Life insurance terminology
Life insurance policies can differ widely. There is the basic off the shelf policy from the supermarket, often has inferior policy wording compared with insurance companies. Yet all policies have some common characteristics.
- Premiums are the regular payments you make to the insurance company. For level or fixed life policies, premiums stay the same throughout the whole term. With a stepped or rate for age, premiums increase every year.
- Indexation gives you the option to increase the amount of cover (premiums will increase equally) you have on an annual basis with inflation, to help combat the effects of inflation.
- Beneficiaries are the people who receive money when the covered person dies or is diagnosed as terminally ill. Choosing life insurance beneficiaries is an important step in planning the impact of your life insurance. Beneficiaries are often spouses, children or parents, but you can choose anyone you like.
- Death benefit refers to the total amount of money the beneficiaries will be paid when the covered person dies. There are two pays the tax-free benefit can be paid out: all in one, or as a tax-free monthly benefit over a period of time, for instance, 10 years.