Life insurance basics
Life insurance is a lump sum that gets paid out to the policy owner or beneficiary if the insured person dies or becomes terminally ill (meaning they have less than 12 months to live).1 People often take out life insurance to protect themselves or their family from financial problems in case of a tragedy.
While we all know life is a lot of fun, it’s important to remember that few things in it are free. Food, housing, and other necessities cost a lot of money over a lifetime so it’s a smart move to make sure you can provide for your family even if something happens to you.
If you’ve never thought about life insurance or haven’t read much about it, this article will help you change that. Understanding how life insurance works can make it easier to decide whether it’s right for you and how to get the most out of it. Read on to learn more about getting cover, what it can do for you and your family, and how to get past all the confusion and questions you may have.
How does life insurance work?
You apply forlife insurance1
- Choose the cover amount you want
- Get a quote
- Complete underwriting questions
- Assesses application and approves cover
- Issues life insurance policy
- Covers the life insured under the terms of the policy
Insurance Event(Death or terminal illness)3
- Claim is submitted by claimant
- Claim is assessed by insurer
- Advance funeral payment made if assessment takes more time
- Cover amount paid to beneficiary or estate
The above diagram does a good job of explaining life insurance in a simple (and colourful) way. It all starts with applying for cover over the phone. You’ll need to answer some questions about yourself when you apply as insurers need to know about your medical history and lifestyle to help keep premiums lower. Thankfully, some providers (like us) won’t force you to have a blood test or medical during this process. It’s about time getting life insurance became simple!
You can expect to be asked about current or past illnesses and the treatments you’ve had. Questions around diabetes, smoking, and dangerous activities are common too, as well as your age, gender, and occupation. Make sure you answer everything truthfully – and the person on the other end of the phone will be happy to answer any questions you might have! It’s important that you understand that untruthful answers could impact on your ability to claim when the time comes.
A big decision you’ll need to make when it comes to life insurance is how much cover to take out. Most insurers have a minimum cover of $100,000 while the maximum is usually at least $1 - $2 million. You’ll also be asked to declare who you want the money to go to, known as your beneficiary. After that it’s time to relax – you can start living life freely knowing your family won’t be left in financial strain if something happens to you. Your beneficiaries can use the money any way they want, whether it’s for everyday living expenses, paying off the mortgage, or even some life’s little joys.
Know what you’re covered for
Like every product you buy, there are some things that life insurance can’t do. Knowing what you’re covered for and what’s excluded is the best way to make sure you get the most out of your policy. The best place to start is by reading your Policy Document as every policy is different.
Remember that there are likely to be specific terms and conditions around your life insurance benefits. For example, death from accidents or natural causes is covered in a lot of policies but suicide is usually excluded for the first 13 months. For terminal illness benefits, you need to be diagnosed by a doctor with 12 months or less to live. Most providers also have stipulations for other causes of death like war, civil unrest, or dangerous activities.
Life insurance regulations in New Zealand
Like most great countries, New Zealand has laws in place to make sure life insurance isn’t misused or issued unnecessarily. It’s a good idea to read up on your rights and responsibilities so you know exactly what to expect.
If you’ve ever shopped around for insurance, you’ve probably seen the words ‘duty of disclosure‘ come up. This means you need to tell your provider anything that might affect your cover to ensure a smooth claim process.
Is life insurance tax deductible?
When it comes to tax, life insurance premiums aren’t tax-deductible. But look on the bright side; the Inland Revenue Department won’t tax you on any life insurance payouts you or your family receive. Phew!
Why should I take out life insurance?
There are lots of reasons to get life insurance; if you have a partner and at least one child that’s already two great reasons right there! Life insurance is about looking out for the people who make your life worth the ride, whether it’s your spouse and children, community, or even your mates. We all have people who rely on us in some way so it’s good to know they won’t need to deal with the added financial stress when you’re gone. Even if you don’t have dependents right now, getting life insurance early on could make you eligible for a higher cover amount. Once you’re covered, you can keep this higher cover amount in place even if your life stage changes. Just make sure you keep paying your premiums on time so your policy doesn’t lapse. And, if your situation changes you can re-evaluate and request to adjust your cover amount if needed.
While the biggest reason to get life insurance is to look out for your family when you’re gone, remember that it can also benefit you as the policyholder. Some providers offer a terminal illness benefit or optional cover for disabilities and other medical conditions. That means you can get a financial payout to help cover medical expenses or other bills, or at least get your priorities sorted out while you’re still around.
Get life sorted with trusted cover from OneChoice.
Here are some common ways life insurance can come in handy:
Help with mortgage repayments
Your mortgage lender won’t stop chasing repayments if you were to pass away. Without a financial safety net, your family might need to pay off the mortgage on their own or give up the home you worked so hard to provide them. Even if you’re not the main breadwinner, raising a family while balancing a career would become a whole lot harder for your spouse if you weren’t around.
Dealing with short-notice funeral costs
Getting a life insurance claim processed can take a little bit of time depending on the circumstances, but it’s possible that your family would need money right away to organise a funeral or tangi. That’s why some providers offer a partial payout in advance to help with these expenses, letting your family hold a final farewell that’s every bit as memorable as your life was.
Just married or starting a family
Kiwis who get together stay together, according to data collected by Stats NZ. Divorce rates in New Zealand have dropped in the last 25 years so many of us are supporting our families for the long haul.2 At the same time, women are waiting longer than usual to have children - the typical age of new mothers in New Zealand is 30.3
This means a lot of Kiwi parents will be over the age of 50 by the time their children are financially independent, so they’ll need to keep working longer to support them. Instead of worrying about common health issues creeping up as you get older, life insurance is a great way to make sure your family will still be looked after financially if something did happen to you.
There are many single-parent families in New Zealand.4 With more and more Kiwis supporting their kids solo, the risk of children being left without financial support is even higher. Having life insurance is one way of making sure your children (or their legal guardian) won’t be left in need if you passed away.
Transferring life insurance or switching providers
Life changes over time so it’s understandable that your life insurance should too. If your situation changes drastically, if you have a joint policy you can transfer ownership of your policy to the other person insured.
Switching providers is also an option that might make sense for some people, like if your personal circumstances change and you want to take advantage of different benefits or cover amounts offered by another provider.
Wondering if life insurance is right for your life stage? Read about life insurance for life stages.
While switching providers is a great way to get the best possible deal, it comes with other potential roadblocks you need to consider – aside from just hurting your old provider's feelings. Cancelling an existing policy means you'll lose all your accumulated bonuses or rewards that come with it. That includes your multi-policy discount and bonus return on some of your first-year premiums. There are also risks to consider if you want to change your cover, including that your new policy may not have the same inclusions, and there may be additional exclusions. Also, you may find that your new insurer may limit the level of cover available or it may be more expensive due to the changes in your health since you originally got cover.
Before making the move, make sure you also consider whether you're eligible for cover with another provider. Every life insurance company has their own approval criteria and underwriting questions which could affect your ability to get cover, so be sure to check that your new provider is on board. There's nothing worse than ditching one provider and being denied by another.
Remember that every policy also has different inclusions and exclusions that affect the overall value you receive. Even though one aspect of a policy can seem appealing, you might be giving up cover for something else you're likely to need. You can avoid this by checking both policies thoroughly to make sure you're making the best decision for yourself and your family.
- Insurance in New Zealand, a guide for migrants — New Zealand Immigration
- Marriage and divorce falling out of favour — Stats New Zealand
- New Zealand women are having their first child at age 30 — Stats New Zealand
- 2013 Census QuickStats about families and households — Stats New Zealand