What is life insurance?
Life insurance can provide a lump sum payment to your beneficiaries – such as your partner, children or other family members – if you pass away or are diagnosed with a terminal illness with a life expectancy of 12 months or less.
A life insurance payout can help ease the financial pressures associated with bereavement, and provide a stable future for loved ones.
What are the different types of life insurance in New Zealand?
There are four main types of cover grouped broadly under life insurance:
Term life insurance
Also known as death cover, term life insurance pays out a lump sum to your nominated beneficiaries if you pass away or are diagnosed with a terminal illness.
Total and Permanent Disability insurance
Total and permanent disability (TPD) insurance pays you a lump sum if you become permanently disabled and unable to work again, either in your current job or in any occupation you're qualified for.
Income protection insurance
Income protection insurance involves the insurer paying you a percentage of your pre-tax income if you become unable to work for a period of time due to illness or injury.
Trauma insurance
Trauma insurance (also known as critical illness or recovery insurance) pays you a lump sum if you suffer a significant injury or illness, such as cancer, a stroke or a head injury.
Usually, life insurance policies can be taken out:
- As a direct policy purchased from a provider, via its website or over the phone.
- Through an intermediary, such as a specialised financial adviser or insurance broker. This is often referred to as advised life insurance
How does life insurance work?
Taking out life insurance involves a few key steps:
Applying for cover
Once you've chosen a life insurance, you need to apply for a policy. If you're applying directly with an insurance provider or through an adviser, you'll usually go through a process called underwriting.
Typically, this involves answering questions about your health and lifestyle, such as your age, occupation, whether you smoke and the activities you take part in. It's important to answer honestly, as incorrect information could affect a future claim.
Choosing your cover amount
You'll also need to decide on the sum insured, which is the amount that could be paid if a claim is approved.
Paying your premiums
Your insurer will set a premium based on the information you provide. This is the amount you'll need to pay to keep your policy active. Many policies use age-stepped premiums, which generally increase as you get older. Some insurers offer variable/level premiums, which are more consistent over time, but usually start at a higher cost. In some cases, insurers may also exclude certain pre-existing medical conditions from cover.
Claiming if an insured event occurs
Once your policy is active, you or your beneficiaries can make a claim if an insured event occurs, such as death or terminal illness, in line with the terms of the policy.
What is a life insurance beneficiary?
A beneficiary is a dependant you nominate to receive a life insurance payout if a claim is made. A dependant for life insurance terms is outlined as:
- A spouse, including married, de facto and same-sex partners
- A child, including adopted, stepchildren, non-related children from previous marriages and children of the current spouse
- Someone you live with, in a household in which one or both of you provide financial, domestic and personal support
- Someone who relies on you for financial support
- Your legal representative, who is usually the executor or administrator of your estate
Simply naming someone in your will doesn't necessarily mean they'll receive your life insurance payout. Generally speaking, if you want your payout to be distributed from your estate, you'll need to nominate either your legal representative or estate as your beneficiary.
What is a life insurance exclusion?
An exclusion is an event or situation that is not covered by your policy. Common life insurance exclusions include:
- Dangerous occupations that come with increased risks of injury or death (e.g., truck drivers, forestry and construction workers, etc.)
- Partaking in high-risk hobbies, such as skydiving, hang-gliding and motor racing
- Claims arising from suicide or self-harm (there may be a waiting period associated with claims of this nature)
- Providing false or misleading information to your insurer
- Illegal or criminal actions that result in a claim
- Claims arising from reckless or negligent behaviour (e.g., dangerous driving or ignoring warnings)
- Certain pre-existing medical conditions, especially those not disclosed to the insurer
- Claims arising from substance abuse
- Not paying your premiums, leading to your cover lapsing
- Travelling to high-risk locations, especially those with a SafeTravel advice level of "Do not travel"
- Acts of war or terrorism
Check your policy's Product Disclosure Statement (PDS) for more information on what is and isn't covered.
What are pre-existing conditions in life insurance?
A pre-existing medical condition is one that has affected you, or you've been treated for, in the past. Even if it was treated successfully, you'll still need to disclose it to your life insurer. There are various definitions of pre-existing medical conditions, so it's worth discussing the topic with any potential insurer.
Examples of pre-existing medical conditions
- Arthritis
- Asthma
- Cancer
- Diabetes
- Heart disease
- High blood pressure
- High cholesterol
- Kidney or liver disease
- Melanoma
- Mental health conditions (including anxiety and depression)
- Musculoskeletal conditions
- Sleep apnoea
- Stroke
Examples of medical conditions that may not be considered pre-existing
- Injuries that you've fully recovered from, e.g. broken bones
- Minor colds and flu
- Minor surgeries, such as wisdom tooth extractions
- Non-chronic skin conditions, such as mild eczema or acne
- Routine pregnancies
- Seasonal allergies
Can you apply for life insurance with a pre-existing medical condition?
Even if you have a pre-existing medical condition, you may still be able to take out life insurance , but it will depend on your insurer. In some cases, they may ask you to undergo a medical examination to better understand the risks associated with your condition.
When applying with a pre-existing medical condition, an insurer may choose to:
- Cover your pre-existing condition
- Exclude the condition from coverage, meaning claims arising due to the condition may be denied
- Cover the condition at an increased premium
- Be unable to offer you coverage
Like other forms of insurance, life insurance can come with optional forms of cover you can add to your policy – usually for an additional premium. These can include:
- Accidental death benefits: provides an additional benefit to your beneficiaries if your death is caused by an accident
- Children's cover: offers a lump sum if a dependant child passes away or is diagnosed with a specified critical illness, such as cancer or major organ failure
- Premium waiver: waives future premiums if you become totally disabled and unable to work
Do I need life insurance?
It's a good idea to seek professional financial advice to help you decide whether purchasing a policy is right for you.
If you're considering buying a policy, ask yourself questions such as:
- If you passed away, would your family be able to maintain its current standard of living into the future?
- If you were permanently disabled and left unable to work, would your household be able to manage financially?
- If you were to suffer a short-term, serious illness, which left you unable to work for an extended period, would you be able to afford to continue living in your current home during your recovery?
Based on your responses, you may benefit from having a level of cover in place.
How to choose the right life insurance for you
When looking for the right life insurance policy for you, think about the following:
- What do you want to be covered for? For example, do you need term life insurance, TPD, income protection, trauma insurance or a combination of the four
- What size financial payout would you require? Think about your family's financial needs and how much money they'd need to maintain their current lifestyle if something happened to you. However, remember that larger payouts come with larger premiums
- How much can you afford to spend on premiums? Comparing your life insurance options can help you find a policy that's right for you, while also giving you value for money
- Are your pre-existing medical conditions covered or excluded?
- Seek professional financial advice
How to compare life insurance
When comparing life insurance policies, consider the following:
- The cost of a policy and how you're paying your premiums, for example age-stepped or variable premiums
- The benefit or sum insured amount
- What waiting periods apply (the time you must wait before you can make a claim)
- Whether your pre-existing medical conditions are covered
What are the pros and cons of life insurance?
Potential pros
- The ability to take out cover that meets your needs and offers a financial safety net for your dependants
- Gives you peace of mind that your dependants will be financially secure if you pass away
- Flexible options around the types of cover you can take out, as well as how you pay your premiums, for example age-stepped or variable premiums
- Benefits paid out to dependants are usually tax-free
Potential cons:
- Premiums can be expensive
- Your pre-existing medical conditions may be excluded from cover or you may not be offered cover at all. You may also have to serve waiting periods before you can make a claim
- The benefit amount you choose could leave you underinsured, especially if the cost of your family's needs increases over time
- You may find it harder, or more expensive, to take out cover if you're an older person, aged 65 or older
Looking for cheap life insurance?
If you're shopping around for cover, you might be tempted to go with a cheap life insurance policy to keep costs down. But it's important to consider the level of cover it offers, as this can affect its overall value. A low-cost policy may offer a smaller payout or exclude certain risks that could be relevant to your job or hobbies.
Your lifestyle, such as whether you smoke, can also affect the premium you pay. It's worth comparing policies to find one that provides the right level of cover for you and your family while still offering good value for money.
Tips to reduce life insurance premiums
If you want to save money on your life insurance premiums, consider the following:
- Improve your health and lifestyle. For example, smokers often pay much higher premiums than non-smokers. If you decide to quit smoking, your insurer may lower your premiums after 12 months
- Some providers offer customers a discount for paying premiums yearly, instead of monthly
- Determine what cover you actually need, as you may not require all forms or features of cover (for example, you may want term life insurance but not require TPD or income protection insurance). You should also consider reviewing your coverage amounts to ensure that you're not overinsured
- If you have multiple insurance policies with the one provider, you may receive a multi-policy discount. That said, it's important to consider whether you're getting the value out of having multiple policies with the same provider, rather than policies with separate providers
- Obtain quotes from a range of different providers to ensure you're getting an adequate level of cover and good value for your money.
How do I make a life insurance claim?
Making a claim on your life insurance policy should be fairly straightforward:
- Notify your insurer that you want to make a claim via their online portal or by contacting them directly
- Submit the necessary forms and required medical evidence
- Your insurer will then make an assessment of your claim
- If your claim is successful, your insurer will payout your benefit amount to your chosen beneficiary/beneficiaries
If your claim is rejected, you may still have options. If you disagree with your insurer's assessment, you can usually make a complaint directly to them and request additional information. If you're still unsatisfied with their outcome, you can make an official complaint to the Australian Financial Complaints Authority (AFCA).
Is life insurance tax deductible?
If you take out income protection insurance, and the payout is taxable, then you are able to claim the cost of your policy as a tax deduction. Be sure to check with your insurance provider and tax professional to see if your chosen policy is deductible.
