Death, illness, and accidents have a major impact on households financial well-being, and life insurance is an important tool in helping individuals and families recover from the major setback that an unexpected event like this can cause.
Navigating the world of life insurance can often seem like traversing a complex maze. In New Zealand, understanding the nuances of different types of insurance policies is crucial for financial security and peace of mind – and being sure that when the worst happens, your insurance policies will work as expected. This blog post explores life, income, trauma, and disability insurance, detailing how they work, the situations they cover, and the importance of a comprehensive insurance strategy.
What do we mean by Life Insurance?
Life insurance is a blanket term that covers a range of different products that provide insurance cover over a person. There are four broad categories that are generally available in New Zealand that cover a range of risks and events – ranging from illnesses and accidents that might result in weeks or months away from work, through to major conditions that can permanently affect health and income, and unforeseen tragedies that lead to death.
Fidelity insurance, one of the many insurers in New Zealand who offer a range of life insurance products here, have published a series of videos from customers talking about their experiences with illness and injury and how it affected them – and how their insurance policies helped. You can see them here.
Insurance on your life
This is what most people think of when they hear the term “life insurance” – a policy that provides a lump sum payment to your loved ones in the event of your untimely death. It can help ensuring that your family or financial dependants can maintain their lifestyle, pay off debts, and cover funeral costs, and its particularly important if the life insured is a main income earner.
There are some situations where a life insurance policy may not be necessary, or can be relatively modest. These include:
- If you don’t have a financially dependant partner or children.
- If you have sufficient realisable assets (apart from the family home) that would be sufficient for your dependants to maintain their lifestyle without any additional funds.
You may still want to consider a small policy to give short-term funds to cover things like funeral or legal expenses.
When choosing a life insurance policy, you should give careful consideration to the coverage amount. We often suggest a starting sum thats sufficient to cover any mortgage on the family home, plus several years of income. The sum can be reduced by the value of some of your investments – your KiwiSaver funds, for example.
Income Insurance
Income protection insurance safeguards your earnings if you’re unable to work due to illness or injury.
Income protection policies come in a variety of flavours – some of them are dependant on your income, or may be based on your mortgage or rental payments and other expenses. They can be for a value thats agreed upfront, or based on your actual income at the time you make a claim.
Typically, income protection insurance will cover a portion of your income only, and can be tailored to start after a waiting period and continue for a predetermined period or until a specific age. The specific terms of the policy can have a big impact on cost – a policy that covers 80% of your income, with a 2 week waiting period, paying out til age 65 will cost significantly more that one with a 13 week wait period only paying out for 2 years, for example.
We view income insurance as the “core” policy for most people who are still working. As with life insurance, covering housing costs is usually the first step, with the income policy ideally being sufficient to cover rent or mortgage payments plus some expenses. This can be reduced if both you and your partner work – but be aware that if you’re off work with an injury or illness for extended periods of time it can often affect your partners ability to work as well.
Trauma Insurance
Trauma insurance provides a lump sum payment if you’re diagnosed with a specific serious illness or suffer a major injury. It’s designed to ease financial burdens during difficult times, allowing you to focus on recovery.
Most trauma policies specify a list of conditions and injuries that will trigger payment – examples include heart attacks, stroke, cancer diagnosis (usually at stage 2 or later), paralysis, and brain injuries. Policies vary in what they cover, and should provide a specific list in their terms. Trauma policies are designed to cover major events that are seriously life-impacting, although many policies will provide part payments for less serious issues.
We often use annual income as a basis for the level of trauma cover – a years income paid as a lump sum in the event of a major medical issue can provide significant financial relief and can be a good balance between cover level and premium cost.
Total Disability Insurance
Disability insurance offers financial support if you become permanently disabled and unable to ever work again. Think of it as similar to a life insurance policy – if you suffer an event so extreme that you’ll never work again, but survive, thats what total and permanent disability (TPD) cover provides for.
In many ways a total disability event can be more devastating from a financial planning perspective than death, as no only does your household lose your income, but you’re still faced with funding living expenses – and if the disability event was major, often ongoing medical care costs as well.
Disability cover can be provided on an any or own occupation basis. An any occupation policy will pay if you can never work again in any field, and claims at this level are quite uncommon. An own occupation policy will cover your loss of ability to work in your exiting profession and can be more nuanced – for example, a relatively minor injury to a surgeons hands, or minor loss of vision for a pilot, can be sufficient in some cases for a claim to be made.
Designing an appropriate policy structure
We look at a range of aspects of clients situation when we’re designing a policy structure – some examples include:
- Do they have financial dependants – children, and / or a financially dependant spouse?
- Do they own the home they live in, and do they have mortgage debt?
- How is the household income made up? Is the household highly dependant on one persons income, or are there multiple sources of income – and what would happen to those sources of income if a claimable event occurred?
- What other assets and liabilities do they have, and whats their net position? How liquid are their assets outside of their home?
- What lifestyle do they lead today, and how would it be affected by a claim?
- Whats their budget for insurances?
- How risk tolerant are they?
As a general guide, we’ll start with a policy structure that at least provides for housing and basic living expenses to be covered for as long as a claim lasts. For income policies, as an example, we’ll look at mortgage or rent payments and household expenses less savings rate as a starting guide, and adjust for things like client budget, their savings levels, and their ability to adjust their lifestyle.
A key decision is often the level of income, trauma, and disability cover and the tradeoffs between each. We’ll usually try and align these to the household income, and to help reduce income policy costs, try and encourage clients to hold sufficient savings or liquid investments to cover at least three months worth of expenses on their own – as a longer wait period on an income policy can significantly reduce the premium cost.
Using a financial adviser
Financial advisers will generally have access to a range of insurers and be able to advise across a number of different types of life, income, disability, and trauma policies, and tailor a structure to best suit your individual situation and risks. Life insurance can be highly complex and commercially technical – it can often be a bit help having an experience professional help you work through the options and decisions.
We provide life and insurance and medical insurance advice, both as part of our comprehensive financial planning services, or on a standalone basis. Reach out to us for a free initial consultation now.