What is Life Insurance?

Co-Author:  Michelle Norton

What is life insurance, and why do you need life insurance? How much insurance cover do you need?

What is life insurance?

Life insurance is a lump sum payment to your family and other beneficiaries, in the event of your death or upon being diagnosed with a terminal illness. The purpose of life insurance is to provide your family with financial security if you were to pass away.

Life insurance can also include multiple different types of cover for you to choose from, depending on your circumstances:

Term life insurance:

Term life insurance, or term assurance, is a form of life insurance that provides coverage at a fixed rate of payments for a defined period of time. Once that term ends, it is up to the policy owner whether to renew the policy or to let the coverage end.

Trauma insurance:

Provides a lump sum of money to help you meet medical expenses and clear debts when you have suffered a medical trauma.

Total and Permanent Disability (TPD) Cover:

Provides a lump sum payment if you become totally and permanently disabled, so that you are no longer able to work.

Income Protection Insurance: Provides a monthly payment if you are unable to work due to serious illness or injury.

Why do you need life insurance?

Life insurance can provide financial peace of mind that you and your family would be covered for some of the major expenses of life if something were to happen to you.

As discussed above, there are multiple different types of cover that fall under the life insurance “suite” of products, and each type of insurance can provide a certain benefit payment to help you and your family after different types of life events, such as death, critical illness, disability, or serious injury.

Here’s a quick snapshot of why each of these products can be extremely useful as a financial safeguard…

What is Term Life Insurance?

Term life insurance, is what we usually mean when we talk about “life insurance”. It provides a lump sum payment to you or your beneficiaries (your family or the loved ones you specify in your policy) when you die or are diagnosed with a terminal illness that will end in death within a specified period – usually 12 or 24 months. If you are the policy owner and have not nominated any beneficiaries on the policy, the proceeds will be distributed according to your will.

Term life insurance can help your dependents (your spouse and/or children) pay out any debts that you may have, and it can provide for the future needs of any children you have. It can also provide a lump sum of money that that your partner can invest and gain an income from.

What is Trauma Insurance?

Trauma insurance can provide a lump sum of money to help you meet medical expenses and clear debts when you have suffered a medical trauma.

Medical traumas are defined by each policy as a list of specified illnesses and injuries. The type of traumas covered will differ between policies, with some of the more commonly-defined events being cancer, heart attack, and stroke.

What is Total and Permanent Disability (TPD) Cover?

TPD cover pays you a lump sum if you become totally and permanently disabled.

The definition of total and permanent disability (TPD) varies between insurance companies, but it essentially means that you are disabled to the extent that you will probably be unable to work again. This can be defined as unable to work in your own current occupation, or unable to work in any occupation again.

What is Income Protection Insurance?

Income protection insurance offers to pay you a monthly benefit if you are unable to work for a certain period of time because of illness or injury.

Policies will insure you for up to a set percentage of your current regular income (commonly 75% of your gross salary), and for up to a certain length of time. In the event that you cannot work due to illness or injury, you can make a claim and your income protection insurance will “kick in” after a certain waiting period specified in the policy, e.g. 30 days. After the waiting period, the policy should pay you the agreed amount until you are able to return to work or for the agreed period of time – whichever is sooner.

Some policies also include cover to continue KiwiSaver contributions, even if you are unable to work.

How much life insurance do I need?

Ask your financial adviser about how you can get the right life insurance coverage for your situation and your budget.

There are a number of factors that can influence on the cost of your life insurance. The insurance company will ask about your age, sex, occupation, lifestyle and health – as these are all risk factors that affect the probability of a claim, the Citizens Advice Bureau states.

If you’d like to spend less on your life insurance, there are some lifestyle changes you can consider:

  • Giving up smoking, or never starting in the first place
  • Participating in regular exercise
  • Achieving, and maintaining, a healthy body mass index (BMI)

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