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Life Insurance
Published by Scott Miller
Life Insurance
Life insurance in New Zealand is an important way to provide financial security for families and individuals in the event of death or terminal illness. According to a 2017 survey by the New Zealand Financial Services Council, about two-thirds of New Zealanders have some form of life insurance in place. It can also help cover costs associated with funeral expenses which can alleviate the need for separate funeral insurance. Life insurance is a long-term commitment and it is important to understand the different types of policies available and how they may affect your family and your finances. Most people will initially take out a "stepped" or "age rated" policy. This is primarily due to the low cost at the start. The other option is a “Level” life policy which starts off a little more expensive but will cost less and potentially save a large amount of money over the life of the policy.
For example, let’s say Minnie Mouse is 25 years old, a non-smoker and has just bought her first house with her fiancé Mickey which has created a lending debt of $500,000. Now there are a couple of things Minnie needs to think about;
Purpose:
What is the purpose of this life cover? If a claim is paid, where are the funds going? Minnie has decided that she wants to ensure that if she passes away, Mickey will be able to pay off the mortgage, and not be concerned about the loss of her income to help make ends meet. They intend on paying the mortgage off before they enter retirement and have no other purpose for the Life Cover. For this reason, Minnie is going to have $500,000 of Life Cover, Levelled to age 65, with no indexation.
With this strategy Minnie’s Life Insurance would cost approximately $20 per fortnight and will stay that price right up to her 65th Birthday. If Minnie had chosen the “stepped” structure to keep the premiums lower intially, they would only start off at around $13.30 per fortnight, however, by the time she reaches 65, those premiums would have increased to around $185.00 per fortnight. Over the life of that policy that is an approximate savings of $27,000 by choosing a level structure!
But now Minnie has decided that they would like to start a family in a few years, and if a life claim hasn’t needed to be paid by age 65, she would like to ensure the life insurance policy is available as an inheritance to any of her future children. So she is going to level it to age 100 instead. Now her premiums will start at approximately $34.30 per fortnight, but will continue at that rate until her 65th Birthday. If she had chosen a stepped structure, and was luckly enough to live right up to age 100, her fortnightly premium would have increased to a whopping estimated $7,320 per fortnight! That would save her approximately just over $2,000,000 over the life of that policy!
Indexation:
When considering life insurance in New Zealand, it is important to understand indexation and how it works. Indexation can provide you with peace of mind that your family will be taken care of financially regardless of the cost of living. Indexation ensures that your life insurance payments keep up with the rate of inflation so that your family will still be provided for even if the cost of living increases. It is a way of calculating a life insurance sum insured based on the current rate of inflation. Indexation works by linking the cover to the cost of living index, which is a measure of inflation in New Zealand. This means that as the cost of living increases, so does the sum insured and so does the premium.
Minnie’s Scenario above is calculated with no indexation, as the intial reason is just to pay the mortgage off, for which that debt balance will reduce over time. In regards to the inheritance, this is ultimately a bonus for Minnie’s children and grandchildren. Obviously, $500,000 today, is not going to be worth $500,000 in 45 years. If Minnie wants to have the sum insured increase with inflation we can add the indexation on to the cover. The best potential scenario is to include the indexation, and at your annual renewal each year, you can request with your insurance provider to decline the CPI adjustment. At least that way, you have a choice each year.
Ownership:
What happens when you own your own life insurance policy? If you were to pass away and a life claim was payable, these funds would be paid to your estate. Depending on your scenario in regards to assets and investments this would not be released until probate had been finalised. Now this time frame can vary, depending on the size and location of your assets. Do these funds need to be available for their intended purpose immediately? If they do, I would always recommend having joint ownership of a Life Insurance policy, which gives the surviving owner, access to the funds a lot quicker. This is something you can discuss with your financial adviser and of course your lawyer.
Watch this space for more information and more deep dives into the world of personal insurance. If you want to know more, get in touch with Sarah and come have a chat. You can also find her on Facebook.