Life insurance is important for you to consider as it protects your assets and your loved ones if the worst was to happen.
What is Life Insurance?
Life Insurance is designed to pay out a lump sum in the event of passing away whether it be due to old age, Illness and Injury – you are covered. It also includes Terminal Illness which means upon diagnosis of having less than 12 months to live you can elect to have your either some or all of your life insurance policy paid out to in advance. This helps you make prior arrangements whilst you are still able to be involved in the process.
Is Bereavement Cover or Funeral Expenses included?
Yes Funeral Cover is included with all our Life Insurance and will typically be the first amount to pay out. The amount can vary between $10,000 – $25,000, with the most common amount being $15,000. This amount often comes off the total sum insured so we make sure to factor it into the key areas you need to consider when arranging cover mentioned a few points below.
What about Life Income Cover?
You can elect to have all or some of your Life Insurance under a Life Income Policy also known as Family Protection Cover which will provide your family with a monthly amount in the event of you passing based on the selected number of years you wish to cover. For example: you might choose to have $5,000 per month paid out for 5 years, which could be until your youngest child is 18. This requires a decent amount of thought so it’s a good idea to know your options and gain advice about why you are arranging a monthly amount instead of a Lump Sum before you jump into this one.
Where is my Life Insurance Policy paid out to?
This completely depends on the ownership and beneficiary structure you have on your cover. If you are the only owner than the policy will pay-out to your estate and the court will decide how the money would be disbursed, this is when a Will is very important something we always ask all our clients to setup. For our clients in serious relationships than they would normally have what we call “joint ownership” whereby the policy is paid to the remaining owner (survivor) on the policy. Due to our ever changing world now and the likes of blended families some of our clients will choose to get expert advice from a lawyer who will then instruct us what the best course of action is. So it does depend on your situation but more often than not the first two scenarios occur. In terms of beneficiaries being noted on your policy, only some Insurers offer this and so more often than not the importance relies on ownership setup and a supporting will.
So how important is ownership structure?
Well as you can see from the above point, ownership structure is so crucial to make sure the money ends up in the right hands. This is also very essential to review and update when a new relationship is formed (not too quickly though) and when an existing one ends. You have to remember that making the decision to have joint ownership should not be taken lightly as you are relying on that person to do exactly as you would hope with the money they receive.
What key areas should I think about when I pick a level of Life Cover?
Choosing the right level of Life Cover is the most important part really, as you don’t want to have too little cover for you or your family. When we talk to our clients we cover off many areas that are relevant to their situation which we establish through the initial phone call and fact find part of our advice process. Some of the key points are: paying off debt i.e. mortgage, personal or business loans, funeral expense cover (bereavement benefit), money for remaining spouse and children, and funds towards their future education or towards a first home, income in the case of terminal illness and anything else really that is important to the assured. You can customise it to suit what is important to you.
But what about my KiwiSaver balance is that worth factoring in?
Absolutely! A lot of people forget that while they are building their KiwiSaver accounts they are also in a way building a Life Insurance policy. No it’s certainly not called Life Insurance but the amount invested in your KiwiSaver account (should you pass before you withdraw it i.e age 65) would also be sent to your estate upon passing. Therefore your KiwiSaver balance can come off the total amount of Life cover you need. Another reason why we really like to help our clients build their KiwiSaver Fund.
Are my kids covered with Life Insurance?
The amount you can insure your child for is very restricted as the Insurers must follow an important rule under section 67B of the Life Insurance Act 1908 which states companies cannot pay a sum insured amount greater than $2,000 plus the total premiums paid on a policy (so far) upon the passing of a child under 10 years of age. With this in mind often by you having Life Insurance Cover in place your children will by default be covered up to $2,000 under 10 years of age and up to $15,000 between 10 – 21 years of age.
Is Life Insurance a taxable benefit?
No, this will not be taxed at claimed time. It is also not subject to Goods and Service Tax (GST).
What about my Life Insurance premiums increasing over time, can I stop this?
Life Insurance provides different premium structures, typically they are called Rate For Age which sees the premiums increase as you age, and Level which provides a fixed premium over time. You can also have a combination of both structures. Choosing between these two options or whether to have some cover on Level or not really comes down to whether you know how long you would like to have cover and how much you would like to lock in under Level. Level does provide certainty but the premium will be higher initially then Rate For Age. There is also the argument that your need for cover will actually decrease as time goes on, for example your mortgage could reduce (depending on whether you buy up or not) and your kids will grow up so your need for cover could reduce. These are only examples though and it’s best discussed with your adviser to get right.
Should I link my cover in line with inflation?
Another consideration is linking your Life Cover sum insured amount with inflation. Generally we recommend you do as we would suggest it be best that the value of your cover doesn’t decrease over time with the value of the dollar. Remember you can always arrange to decrease your cover through a signed request with your insurer at any point, whereas to increase your cover generally you need to apply with an application unless a Special Event has occurred.
What is considered a Special Event? And how does this allow me to increase my policy without underwriting?
Over time our medical situation can change and in some instances it might deteriorate which makes it harder to increase our cover, or it might mean we have some “terms” i.e. a loading on the policy we didn’t have before. This is when knowing about Special Events Increases and exactly when you can exercise them on your policy is really important. Special Events is actually great even if you don’t have any adverse changes to your health or situation as it provides a very easy increase option. Special Events is sometimes provider specific so here are some examples of what can be included but generally you are best to ask first or check with an expert.
Special Events: having a child or adopting, your child starting secondary school, taking our or increasing your (sometimes only residential applies) home loan, receiving a salary increase, divorce or legal separation, marriage or civil union, death or terminal illness of a spouse or de-facto partner, every 5th policy anniversary, taking on full time care of a dependant relative, purchasing a block or land, an increase in net profits.
How much can I increase under a Special Event on my Life Cover policy?
Well that does depend on your Provider and what your initial cover level was when you first signed up. The amount is normally based on what the event allows and limited to a figure set by your Insurer for example: $300,000 but this not be more than the amount you initially insured yourself for or higher than the increase in mortgage or 5 times annual salary etc. In most cases you will want to get some expert help with this one with figuring out what will be allowed.
Does Life Cover provide worldwide protection?
Certainly with our Providers you would be insured anywhere in the world. Whether you are on holiday or choose to move overseas temporarily or permanently, providing you continue to pay your premiums – you are covered!
What other additional benefits might be included in my Life Cover?
Some other areas you might not know are covered depending on provider are: Financial and Legal Advice of up to $2,000 – $3,000 to pay for the cost of financial planning or a lawyer, Counselling benefit up to $2,500, Terminal Illness Advance Benefit this will pay out a percentage of the Sum Insured if you have suffered one of the listed conditions and as a result have been given less than 24 months to live, Suspension of Cover benefit to place your cover on hold should you not be working or suffer a loss of income.
I can’t get Life Insurance, what other options do I have?
Unfortunately in some instances due to a clients medical situation they might not be offered any Life Insurance Cover. Another option is to look at an Accidental Death policy which will provide a lump sum as a result of an injury causing you to pass away. This is very much an inferior option and would only be usually looked at as a last resort. This is due to the fact we are most likely to pass away due to an illness so of course we want to make sure we have completely ruled out Life Cover being available first.
Our adviser can help you choose the right amount of life insurance
As you can see there is a lot of considerations involved with taking out a simple Life Insurance policy. In summary the amount of life insurance you need will depend on your situation – for example, how old you are currently, how many dependents you have, your financial situation, goals etc. The cost of premiums is based on age and current health and can vary among providers based on their offering and your health, job and situation.
You may also like to include Critical Illness or Trauma cover which protects you in the event of a non-terminal illness or accident with your Life Insurance policy to protect you while you are alive.
Our insurance adviser can help you assess your needs and advise on the best option. Feel free to contact us to discuss which cover would be right for you. We work with clients across Auckland and NZ-wide.
Other sources which might interest you:
Check out some great articles written by our Life Insurance Providers
Fidelity Life – Life Insurance Basics, Why Do Premiums Increase?
Partners Life – What’s better buying direct or through a Financial Adviser?