Life is unpredictable and nobody can say for sure how long they’re going to live. This is something we all know, but don’t really want to think about. It’s not a cheerful topic. However, if you have dependents that rely on you for financial support, it’s important to think about how they’d cope without you. In other words, do you need to build a financial lifeboat to keep your loved ones afloat if you die?
For most people, the answer is “yes, bring on the lifeboat!”. It feels good to know your partner, kids and anyone else you support will get a lump sum of money if you die.
The easiest way to build your family’s lifeboat is to get life cover. It’s a type of life insurance that pays a lump sum to your nearest and dearest in the event of your death. Most life cover policies will also pay out if you’re diagnosed with a terminal condition that gives you less than a year to live.
In this comprehensive guide, tailored to a New Zealand audience, we’ll delve into the ins and outs of life cover. By the end you’ll know enough to talk intelligently to a financial adviser or directly with a life insurance company.
Why life cover matters
Life cover provides financial support to your dependents when you’re no longer there to provide for them. It can help cover funeral expenses, mortgage or rent payments, outstanding debts and ensure your family’s lifestyle is maintained.
Two out of three deaths (Maori and non-Maori) in New Zealand are people aged 75 years or older (64%). So for every two older New Zealanders dying, there is one younger person. This is a sobering statistic.
Having life cover gives you peace of mind, because you know that your dependents will be taken care of financially if you’re no longer around. It means you can get on with making the most of life, instead of worrying about things that could go wrong.
What is life cover?
Life cover pays a lump sum in the event of your death. It also pays out if you become terminally ill and only have a short time to live. Its purpose is to provide financial assistance to the people who usually rely on your income, such as your partner/spouse and children.
Until recently, life cover was defined as ‘term cover’ (for a defined timespan) or ‘whole of life cover’ (cover that lasts your whole life). These days, it’s just plain ‘life cover’ and it usually applies for as long as you keep paying the premiums.
The main motivations to get life cover are:
- Ensuring there’s enough money instantly available to cover your funeral costs
- Providing financial support to the people who depend on you
- Settling outstanding debts, like credit card bills, personal loans or home loan payments
- Assisting with childcare expenses if you are usually the primary caregiver
- Securing future financial stability for your children, so they can pursue their educational and life ambitions
- Having money to enjoy the time you have left, if you’re diagnosed with a terminal condition and have less than a year to live
How much life cover can you get?
In most cases, there’s no maximum sum insured. You can choose a life cover lump sum amount that suits your budget and your family’s circumstances. However, a big lump sum means a big premium.
Careful planning with a financial adviser can help you to pinpoint an appropriate amount of cover. There are also online calculators that will give you a rough idea of the cover amount you should have.
If you want to increase cover in the future, you just have to let your insurer know. With some life cover policies, there will be occasions when you can increase cover without having to disclose any additional medical information. For example, when you get married, have a baby or buy a house.
You can also reduce cover, as your situation changes. For instance, if your kids have left home and are living independent lives, you may have less need for cover.
Life cover extras
Every insurer offers a slightly different spin on life insurance, but they all do the basics – like a lump sum payment if you die, a funeral benefit that’s available straight away and some kind of terminal illness support. Most insurers will also let you link your life cover policy to other types of life insurance, such as trauma cover (for serious illness) or income protection (for extended sickness or accident recovery that prevents you from working).
On top of this, each insurer offers a range of special benefits that makes their life cover a little different. For example, they might offer:
- Grief support for the people you leave behind
- Financial planning services for your beneficiaries, so they’ll spend their lump sum wisely
- Life cover for your kids, included in your policy
- Inflation protection, so your lump sum will gradually increase over the years to keep up with the cost of living
- The ability to put your cover on hold for a while, if you’re having trouble paying the premiums
- The opportunity to increase cover at certain times without providing additional medical information
Before you sign up for any life cover policy, ask about benefits that are included and optional benefits you can add.
What does life cover cost?
The cost of life cover depends on the amount you’re insured for, your age and your gender. It’s also affected by individual health factors, like your medical history and whether you smoke.
If you’re a healthy, female 30-year-old, $500,000 worth of life cover could cost as little as $25 a month. If you’re a 50-year-old male, it might cost around $100 a month. These are only ballpark figures, so always ask for a firm quote before you sign up for life cover.
When you’re looking for a suitable life cover policy, it’s wise to obtain quotes from different insurance providers to compare premiums, coverage amounts and policy features. Consider factors such as the insurer’s reputation, financial stability, customer service and claims settlement history.
Life cover premiums can typically be paid monthly, quarterly, half-yearly or annually. Choose a payment frequency that makes it easy to keep your cover going. For example, paying annually means a big hit to your budget, while paying fortnightly spreads the load.
What are the exclusions?
Exclusions for a life cover policy in New Zealand can vary, depending on the insurance provider and the specific terms and conditions of the policy. However, here are some typical exclusions that you may find in a life cover policy:
- Suicide within the first 13 months: Many life insurance policies have a suicide exclusion clause, which means that if the policyholder dies by suicide within the first 13 months of the policy’s inception, the lump sum death benefit may not be payable.
- Pre-existing conditions: Some policies may exclude coverage for pre-existing medical conditions. If the insured person passes away due to a pre-existing condition listed in the policy, the death benefit may not be paid out.
- Accidental death exclusions: Certain types of accidents may be excluded from coverage, such as death resulting from high-risk activities like skydiving, bungee jumping or participating in extreme sports.
- Criminal activity or illegal acts: If the insured person’s death is a result of their involvement in criminal activity or illegal acts, the policy may not provide coverage.
- War and terrorism: Life cover policies may exclude coverage for death resulting from acts of war or acts of terrorism.
- Misrepresentation or non-disclosure: If the insured person provides false information or fails to disclose relevant information during the application process, it may lead to the policy being voided or the death benefit not being paid out.
It’s important to read the fine print on a life cover policy before you sign up. If there’s anything you don’t understand, ask a financial adviser or the insurance company you’re dealing with.
What medical information do you need to provide to get life cover?
When applying for a life cover policy in New Zealand, you’ll typically need to provide specific medical information to the insurance provider. These requirements vary between insurers, but generally, the following medical information may be requested:
- Health questionnaire: You’ll need to complete a health questionnaire that covers various aspects of your medical history. This may include questions about your current health status, past illnesses or injuries, surgeries, hospitalisations, regular medications and existing medical conditions.
- Medical examinations: Depending on the sum insured or the insurer’s underwriting requirements, you may be asked to undergo a medical examination. This typically involves visiting a healthcare professional chosen by the insurance company. The examination may include measurements of height, weight, blood pressure, as well as blood tests. In some cases, additional tests such as an ECG (electrocardiogram) or specific screenings may be required.
- Family medical history: You may be asked to provide information about your family’s medical history, particularly if certain hereditary conditions or diseases are known to run in your family.
- Authorisation for medical records: You may need to sign an authorisation form that permits the insurance company to access your medical records from relevant healthcare providers. This allows the insurer to verify the accuracy of the information provided and assess your overall health.
It’s important to provide accurate and complete information when applying for a life cover policy. Failure to disclose relevant medical information or providing false information could result in the policy being voided or the denial of a claim in the future.
How to get started with life cover
If you’ve decided that life cover is the financial lifeboat your family needs, your next step is to research insurers and the policies they offer, or get the help of a financial adviser. Once you have all the facts, figures and advice you need, choosing will be easier.