What is life insurance?

No one likes to think about dying, but the people closest to you could be left in a tough situation if you suddenly weren't around anymore. If you have people who can depend on you, or debt that would need to be repaid if you died, life insurance can provide peace of mind. 

A report released in 2020 showed that, although New Zealanders understand the importance of life insurance, less than a third of us have adequate life insurance.¹ That's why it's important to know what life insurance is, how much it costs and whether you need it.

¹ Financial Services Council: "Gambling on Life: The Problem of Underinsurance". January 2020. Downloadable from fsc.org.nz

What is life insurance?

Life insurance helps ensure people who rely on you financially are looked after if you die. Life insurance pays out a lump sum on your death, and some policies also pay out if you're diagnosed as terminally ill.

A simple way to think about life insurance is that it helps replace the future income you would have earned if you hadn't passed away. 

Who does life insurance pay out to?

There are two decisions you need to make when you set up a life insurance policy: how much cover you want, and who will receive the proceeds of the policy if you die – you (or your estate) or someone else? The owner of the policy is the person who will receive the lump sum if you die or become terminally ill, and is the only person who can make changes to the policy while it's in place. 

Selecting the right policyholder structure for your policy is an important decision to make, so have a think about your dependents and who you would want your life insurance to be paid to. 

How much does life insurance cost?

What you pay for life insurance depends on factors like the level of cover you select, your age, your health, your occupation, whether or not you smoke, and even your gender – men generally pay a little more than women because of their average lower life expectancy. 

For example, a 35-year-old non-smoking man will pay around $10 a week for $500,000 of life insurance cover. A non-smoking woman the same age will pay about $7 per week for the same amount of cover. 

Life insurance can be structured in two ways. If you opt for stepped – or 'rate for age' – cover, your premiums will increase as you get older. The other option is to select level cover, where the cost stays the same over the long term, but it'll be more expensive initially than stepped cover. 

What does life insurance cover?

Different life insurance providers can cover different situations, so it's important to learn what's covered and excluded in life insurance policies so you can find what's right for you.

In simplest terms, life insurance policies pay if the insured person dies, or is diagnosed as terminally ill with less than 12 months to live. Some causes of death may be excluded from a life insurance policy, so it pays to check your policy wording to make sure you're clear on what's covered.

How do I know if I need life insurance?

The general rule is that if someone relies on you financially, you should consider having life insurance. This could be your partner, kids or step-kids, or even your parents or other older relatives. And it's not only about how you support people financially or with your assets. If you provide care or childcare for someone, and you'd want them to be able to afford alternative care if you were no longer around to help, they could be a dependent too. 

Unfortunately, while we're happy to insure our car, house and contents, us Kiwis aren't as eager to approach life insurance the same way. MAS Life and Disability Product Manager, Phil Belcher, believes ones of the reasons is that most people don't like to think about bad things happening to them or their loved ones.

"People tend to think 'I'm not going to die young - that's never going to happen to me'. And for most people that's true. By contrast, people are good at insuring their cars because they see a higher incidence of car crashes and costs. We need to start thinking about life insurance the same way we do for car, house and contents insurance. We don't take it out expecting something to happen - it's there in case something does."

How do I know if I don't need life insurance?

Not everyone needs life insurance, but everyone should do their research and decide what the best option is for them and their financial situation. We strongly recommend that you speak to an adviser to help work out what is right for you. 

If you don't have dependents or debt, you should weigh up the costs and benefits, and consider whether life insurance premiums are the best thing to do with your money. It could be that investing in your retirement is a better option. 

Even if you don't have anyone relying on you financially, you might want a life insurance payout to leave a bequest to an organisation you care about, or to leave money for someone such as a grandchild. 

If you already hold life insurance and your circumstances have changed since you first got it, you should review it to ensure you only have the cover you need or want. As your needs change, so should your life insurance.