What is life insurance?
Life Insurance pays a lump sum to your loved ones if you pass away (you choose who receives the payment, also known as your nominated beneficiary). You can also receive a sum if you're diagnosed with a terminal illness and have less than 12 months to live.
This payment is most often used to repay mortgages and debts, cover funeral costs, and provide general financial support for your family. You can also use life insurance to cover business debts, lost revenue, and shareholder buyouts if you own a business.
How much do I need?
There are quite are a few things to consider when coming up with your life insurance sum, and this is where your adviser will step in to help you. For personal cover to protect your family, we look at the following:
Debt
- Do you have a mortgage or any other debt?
- Is your family or anyone else liable for your debts?
- Can your surviving family afford to service these debts?
- Do you want to repay all or just some of these debts?
Household income
- How will your household and income be affected by a death?
- Who is the primary income earner? Is the household reliant on this income to survive?
- How will your lifestyle and future goals change due to the change in family situation and change to income?
- Could the household maintain their standard of living if any of the income earners were to pass away? For how long?
Dependents
- Do you have financially dependent children or others?
- How old are your children, and how long until they will be financially independent?
- If you or your partner passed away, would you need financial support for child care?
- Could you continue to afford your children the same lifestyle and education, e.g. holidays, school uniforms, trips, sports, private school or university fees?
- Do you want to provide for their long term financial future, e.g. home deposit contribution, investment savings etc.?
Funeral and estate costs
Funerals can be expensive. The average cost in New Zealand is between $8,000 and $10,000! Think about how much you would like to include for your funeral and any special requests.
Also, consider:
- Do you have a provision for covering any estate, legal or other costs?
- Do I want a single lump-sum payment or an ongoing monthly payment, or a mix of both?
- Will the policy's beneficiary have the knowledge and discipline to make the money last and be used as intended?
Business Cover
Business cover is usually a little more complex, and this is where it's crucial to work with an experienced financial adviser who deals with business owners.
Some of the key questions we ask business owners are:
- What is the shareholder structure? Is there a buy-sell agreement in place to specify how and when shares are sold in the event of a shareholders death?
- What is the company valuation?
- Can you afford to buy out your business partners shares if they die?
- If you can't afford to buy their shares, who will inherit the shares or who will the shares be sold to?
- Will this be an unknown third party? Could this be a competitor?
- Will you have a controlling share in your company or end up working for or with someone you don't know?
- Does the business have any debts? Who is liable, and for how much?
- Do the shareholders have personal guarantees? Who is liable for these in the event the shareholder dies? Will this pass back to your family?
Policy Premium Structure
Different payment structures are available for your policy which you should consider carefully based on your current and future needs and budget. Again, this is an area where an experienced adviser will guide you.
Stepped Premium
The premium is based on your age at the time the policy starts. The premium cost will go up each year based on your increasing age. The rate of premium increase is gradual but rises as a curve, so as you become older, the premium cost and annual increase become more significant. This is suitable for someone who wants the most cost-effective cover in the short to medium term.
Level Premium
The premium is set for a fixed period, so it will not increase each year based on age (underlying premium base rates can vary). This gives certainty of what you will pay for the policy.
The Level period is generally ten years, to Age 65 or Age 80. The premium is initially more expensive than a yearly stepped, but you can make significant savings in the latter stages of the policy compared to yearly stepped with the same sum assured.
If you know that you will always want some Life Insurance in place into older age, then Level cover to Age 65 or 80 is an excellent way of locking in cover at an affordable premium for the long term.
We often split cover between Yearly Stepped and Level Premium to 65 or 80.
Policy Ownership
The policy owner is the beneficiary of the policy, i.e. who gets the money if you pass away.
It's essential to make sure the money goes into the right hands when it's needed – this depends on individual circumstances, so policy ownership should be considered carefully.
Your beneficiary could be your:
- Spouse/Partner
- Estate
- Trust
- Company
- Shareholders
Why you should regularly review your insurance.
We recommend annual insurance reviews (for all types of personal and business insurance) to make sure you're covered correctly.
Personal
- New home with change to mortgage
- Changes to occupation and personal and household income
- New baby or children leaving home
- Relationship changes
Business
- Change to company valuation
- Change to company structure
- New shareholders
This article is for informational purposes only and should not be considered as financial advice. It is always recommended to consult with a qualified financial professional before making any financial decisions based on your individual circumstances.
