Life insurance provides a lump sum payment to your beneficiaries if you die. It sounds simple, but many New Zealanders either have no cover or the wrong amount. Understanding how life insurance works helps you make informed decisions about protecting your family.
Life insurance is not about you. It is about the people who depend on you financially.
ACC and Life Insurance
New Zealand's ACC scheme provides some death benefits for accidental death, covering dependents at 80% of the deceased's income. However, ACC does not cover death from illness. Since most working-age deaths are from illness (cancer, heart disease, stroke) rather than accidents, life insurance remains essential for protecting your family. ACC is a safety net for accidents, but life insurance covers the larger risk of illness-related death.
What Life Insurance Actually Does
When you die, your life insurance pays a tax-free lump sum to whoever you have nominated. This money can cover whatever your family needs: mortgage payments, living expenses, education costs, or just financial security during a difficult time.
The payout amount depends on the cover you have purchased. Someone with $500,000 cover who dies will have $500,000 paid to their beneficiaries.
Life insurance does not cover illness, disability, or inability to work. Those are separate insurance products. Life insurance only pays out on death.
Who Needs Life Insurance
Anyone who has dependents relying on their income should consider life insurance. This includes parents with young children, people with partners who could not manage financially alone, and those with significant debts.
If you died tomorrow, would your family struggle financially? If the answer is yes, life insurance deserves consideration.
Single people without dependents typically do not need life insurance. There is nobody who relies on their income, so there is nothing to protect.
How Much Cover Do You Need
The amount of cover you need depends on your circumstances. Consider what financial obligations would remain if you died: mortgage, other debts, childcare costs, education funding, and living expenses for your family.
A common approach is to calculate how many years of income you want to replace. If you earn $80,000 and want to provide 10 years of income, that suggests $800,000 cover.
More sophisticated calculations consider debt repayment, investment returns on the payout, and decreasing needs as children grow up. A financial adviser can help with precise calculations.
Types Of Life Insurance
Term life insurance provides cover for a set period. You pay premiums for that term, and if you die during the term, your beneficiaries receive the payout. If you survive the term, you receive nothing but have had protection during those years.
Whole of life insurance provides cover until death regardless of when that occurs. Premiums are typically higher, but the policy builds cash value over time.
Most New Zealanders with life insurance have term life cover. It provides protection when it is most needed at affordable premiums.
Premiums And Pricing
Your premium depends on several factors including your age, health, smoking status, occupation, and hobbies. Younger, healthier people pay less because they are statistically less likely to die.
Premiums can be stepped, increasing each year as you age, or level, staying the same throughout the policy term. Stepped premiums start lower but cost more over time. Level premiums start higher but remain constant.
The amount of cover you choose directly affects your premium. More cover costs more.
The Application Process
Applying for life insurance involves answering health and lifestyle questions. Insurers want to understand your risk profile before offering cover.
You may need a medical examination or blood tests depending on your age and the amount of cover you are seeking. Higher cover amounts typically require more detailed medical information.
Be completely honest in your application. Failing to disclose relevant information can result in claims being declined when your family needs the money most.
When Claims Are Paid
Life insurance claims are typically straightforward if the policy is valid and premiums are current. Beneficiaries submit a death certificate and claim form to the insurer.
Payouts usually occur within weeks of claim submission. The money goes to whoever you have nominated as beneficiary.
Claims can be declined if the insurer discovers material non-disclosure in the application. This means the insured person failed to reveal important health or lifestyle information when applying.
Reviewing Your Cover
Life insurance needs change over time. When you first have children, your needs are typically highest. As children become independent and your mortgage reduces, your needs may decrease.
Review your cover when major life events occur: marriage, children, divorce, mortgage changes, or career changes. Ensure your cover still matches your circumstances.
Do not assume the cover you arranged years ago is still appropriate. Regular reviews prevent both under-insurance and paying for more cover than you need.
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