If you’re reading this guide, it’s possible there’s change going on in your life. Usually people think about getting life insurance when something big is going on – like buying a house, having a baby, finding a forever partner or starting work for the first time. When the need for financial protection shows up, life insurance is often the answer.
The first step to getting life insurance is to get educated about the various types and how they help. When you’re researching, it’s important to avoid websites from other countries. Life insurance products are different around the world. Also, they use terminology that isn’t always used in New Zealand.
This guide has been written for New Zealanders by a New Zealander, so you’ll get a clear picture of what’s what for financial protection in our corner of the world.
Why do people get life insurance?
While the words ‘life insurance’ might not get you excited, they should. The idea of protecting your financial future with specific types of insurance is a good one. However, New Zealand is a bit behind the times when it comes to life insurance. According to the Reserve Bank, our country’s rate of life insurance is well below the OECD average.
This state of affairs means many New Zealand families are exposed to major financial risks caused by income disruption (due to sickness or injury) or the death of a household earner.
A Massey University study showed that around 54% of Kiwis have inadequate levels of life insurance, and at least half would suffer a 40% income drop if the primary earner died.
Having life insurance is like installing a financial safety net around you and your family. It means you can focus on pursuing your goals and enjoying life, because there’s a Plan B available to prevent major financial damage if something goes wrong.
What are the main types of life insurance in NZ?
Life insurance is not a one-size-fits-all solution; it’s a whole range of financial products that help in different ways. Most people don’t get them all, because that would be too expensive. Instead, they get a financial adviser to help them choose the right combination of products for their specific needs.
In New Zealand there are five main types of life insurance.
- Life cover
- Trauma cover (aka critical illness cover)
- Total and permanent disability (TPD)
- Income protection
- Mortgage protection
Let’s look at each of these types of life insurance in more detail.
What is life cover?
Life cover provides protection to the people who depend on you financially. If you die it pays a lump sum benefit that can help them with expenses, such as funeral costs, home loan repayments, education expenses and general living costs (think food, utilities and transport).
As the policy owner, you get to select how big the lump sum will be and who it goes to. However, it pays to remember that the more cover you have, the more it will cost. Generally, you’ll choose an amount of cover that’s appropriate for your situation – your age, number of dependents and financial situation.
Until recently, life cover was either ‘term cover’ (for a specific timespan) or ‘whole of life cover’ (cover that lasts your whole life). These days, it’s simply called ‘life cover’ and it generally applies for as long as you keep paying the premiums.
Most life cover policies come with handy extras, such as:
- A lump sum pay out if you’re diagnosed with a terminal illness and are likely to die within a year.
- A percentage pay out if your life expectancy is reduced by a medical diagnosis.
- An immediate funeral expenses payment, so your family can pay for your funeral before the main lump sum is paid out.
- The ability to increase your level of cover at certain times (i.e. getting married, having a baby, getting divorced) without providing any additional health information.
What is trauma cover?
Trauma cover is a type of life insurance that provides a major cash injection if you experience a specified critical illness or injury. It’s a way to balance the risk of some of life’s most unexpected and challenging health events. If you don’t have to worry about money, it’s easier to recover and get back on your feet.
It’s important to remember that trauma cover is different from health insurance. While health insurance helps with medical costs – like doctor visits and surgery – trauma cover is designed to provide a financial buffer for the additional expenses and lifestyle changes that can come with a serious illness or injury.
Here’s how trauma cover works:
- If you’re diagnosed with a covered critical illness (cancer, heart attack, stroke, major heart surgery, motor neurone disease, Alzheimer’s and many more), the insurance company pays you a lump sum amount. Most insurers cover more than 50 conditions. You can see the full list in their policy document.
- This money can be used for anything. You can use it for medical bills, living expenses, or even a much-needed holiday to help you heal and relax.
- There’s usually a limit for trauma cover lump sums, such as $2 million.
How much cover you get is a personal decision. By working with a financial adviser, you can choose a level of cover that’s affordable and effective.
What is TPD cover?
TPD cover is a type of life insurance that can provide financial protection if you become totally and permanently disabled, and unable to work again.
The cost of TPD cover is affected by the type of work you do. If your occupation puts you at greater risk of getting hurt, the premiums are likely to be higher.
To qualify for TPD cover, you’ll need to meet the policy’s definition of total and permanent disability. This definition can vary between insurers, so it pays to read the fine print. Generally, it means that you’re unable to work in your own occupation or any other occupation that you’re qualified for, based on your education, training or experience.
Here’s how TPD cover works:
- If a claim is approved, TPD cover pays a lump sum that can be used however you like. For example, it can go towards living expenses, paying off debts, or funding medical treatment or rehabilitation.
- Some policies provide money for modifying your home or vehicle, so you can adapt to your disability.
- TPD can be purchased as a standalone policy or as part of a life cover policy.
- There’s usually a limit for TPD lump sums, such as $5 million.
What is income protection?
Income protection is a type of life insurance that provides financial support if you’re unable to work due to illness, injury or disability. So even if you can’t earn wages or a salary, you can pay your living expenses and maintain your financial stability.
The interesting thing about income protection insurance is that it’s just as relevant for single people as it is for families. Money coming in equals independence, i.e. you won’t have to move in with family to get by.
You might be thinking “I don’t need income protection, because New Zealand has ACC”. However ACC doesn’t cover sickness; it only covers accidental injuries.
Here’s how income protection cover works:
- If you find yourself unable to work for a certain period of time, due to sickness or injury, the insurance company will pay you a portion of your regular income every month. Often this is something like 75% of your usual income.
- The money you receive can be used for any purpose. You can pay your mortgage or rent, utilities, groceries and other essential expenses while you focus on your recovery.
- When you take out income protection, you need to select a monthly amount (percentage of income), how long you want to wait before a payment can be made and how long you’d like payments to last.
What is mortgage repayment protection?
Mortgage repayment insurance, aka mortgage protection insurance, is designed to help you meet financial commitments if you can’t work due to sickness or an accident. While it’s called ‘mortgage protection’, it can be used to pay rent and living expenses as well. It’s closely related to income protection insurance.
Here’s how mortgage repayment cover works:
- You can choose to cover a percentage of your mortgage or rent or a percentage of your income. So you might choose to insure 45% of your income or 110% of your mortgage repayments, depending on the insurer you choose. It’s important to get advice before choosing the level of cover.
- You need to select a waiting period (length of time before payments start) and a payment term (length of time payments will continue).