Life insurance: how it works and what it costs

Life insurance is a contract. You pay a premium, and in return the insurer agrees to pay an agreed lump sum to your estate or your nominated beneficiary if you die while the policy is in force. Most New Zealand life policies also pay early on terminal illness, so the money can arrive while you are still able to direct how it is used.

That is the whole product. Everything bolted on to it — trauma cover, TPD, income protection, waiver of premium — solves a different problem. It is worth being clear about which problem you are trying to solve before you buy anything, because the cheapest way to overspend on insurance is to buy the wrong product well.

What the money is usually for

• Clearing the mortgage, so the family does not have to sell the house in the worst year of their lives.
• Clearing other debt — car loans, credit cards, personal guarantees given for a business.
• Replacing the income that paid for childcare, school costs and day-to-day living.
• Funding a stay-at-home parent’s unpaid work. Childcare and household costs do not disappear when the person doing them does.
• Covering funeral and estate costs, which routinely run to five figures before probate is even granted.
• Equalising an estate where one child inherits a farm or a business and the others do not.

There is a rule of thumb in circulation that says insure for ten times the highest earner’s salary. It is a starting point, not an answer. It ignores your mortgage balance, whether your partner works, how old your children are, and what you already hold through work.

A more honest method is to add up what actually has to be paid, then subtract what is already there.

1. 1Add your mortgage balance and any other debt you would want cleared.
2. 2Add the cost of raising your children to independence — childcare, schooling, and the income that would have paid for it.
3. 3Add a buffer for funeral and estate costs, and for the year in which nobody in the household is functioning well enough to work.
4. 4Subtract cover you already hold: employer group life, an older policy, KiwiSaver, and liquid savings.
5. 5What is left is roughly your gap. An adviser will sanity-check it against what you can actually afford to insure and keep insured.

On term: match the cover to the liability. Cover taken to clear a 25-year mortgage does not need to run to age 90. Cover taken to raise a two-year-old probably needs about twenty years. Most New Zealand policies are yearly renewable to a maximum age rather than a fixed term, so the practical question is usually when you intend to stop paying, not when the policy expires.

Almost every New Zealand life policy is sold on one of two premium structures, and over a lifetime that choice matters more than which insurer you pick.

Stepped premiums

The premium is recalculated each year against your age, so it starts low and climbs. It is cheap in your thirties and expensive in your sixties — which is precisely when people cancel, often at the point they are most likely to claim.

Level premiums

The premium is fixed to a chosen age — commonly 65, 70 or 80 — so you pay more than stepped early and considerably less later. Insurers can still adjust the underlying rate table for a whole class of policyholders, so “level” is not the same as “guaranteed”, and wordings differ on exactly that point.

Ask for both structures to be modelled to the age you realistically expect to hold the cover, and ask for the stepped line to be modelled at more than 3% a year. Real stepped increases in New Zealand commonly run higher than that, which pulls the crossover point forward by years.

Life insurance pays when you die. These pay while you are alive, and most households need at least one of them more urgently than they need more life cover.

The order most advisers work in is: protect the income first, because that is what pays for everything else; then protect the debt; then protect the family with a lump sum. People usually buy in the opposite order, because life cover is the product they have heard of.

Every New Zealand insurer writes life cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• Terminal illness definitions differ — 12 months’ life expectancy on some wordings, 24 on others. That difference decides whether the money arrives when it is useful.
• Future insurability and special events benefits let you increase cover without new medical evidence when you have a baby, buy a house or take on more debt. Triggers and dollar limits are not standard between insurers.
• Indexation defaults differ. Some insurers increase your cover with CPI automatically unless you decline, and the premium follows.
• Non-smoker definitions vary on vaping, nicotine pouches and how long you must have been clear.
• Financial underwriting limits differ enough that the same person can be offered materially different maximum sums insured.
• Policy wording pass-back — whether later improvements to the wording apply to your existing policy — is offered by some insurers and not others.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.