How much life insurance is right for you will vary depending on your personal circumstances, life stage and the type of insurance you are considering.
What types of life insurance are there?
Life insurance as a category includes different types of cover that can be bought separately or bundled together, including life cover, trauma insurance, total and permanent disability (TPD) cover and income protection insurance.
- Term life insurance: cover that pays a lump sum to your nominated beneficiaries (such as your partner or family members) in the event of your death, or if you are diagnosed with a terminal illness.
- Trauma insurance cover: provides a lump sum of money if you are diagnosed with a specified illness, such as cancer.
- Total and permanent disability (TPD) cover: provides a lump sum payment if you become totally and permanently disabled and are no longer able to work.
- Income protection insurance: provides a benefit, usually paid monthly, to help replace a portion of your income if you are unable to work due to serious illness or injury.
Life insurance can be bought directly from an insurer, or through an insurance broker or financial planner.
How much life insurance do I need?
How much life insurance you need depends on a variety of factors. These include how much cover is needed to pay off your mortgage and other debts, as well as what other money may be available to your loved ones from other sources. Your life stage and budget can also impact your decision-making:
What you’ll receive versus what you’ll need
The amount of life insurance cover you’ll require depends on your beneficiaries’ needs, as well as what you or they will receive from other sources if something happens to you. A rough calculation of the amount of cover required is the difference between the two amounts.
Needs: money that’s required to pay off a mortgage and other debts, in addition to ongoing living expenses (childcare, schooling etc). So if you need $400k to pay off your mortgage and a further $50k per year for a decade to cover your family’s living expenses, your needs will amount to $900k.
Received: money that your family will receive if something happens to you, this could include funds from your KiwiSaver, savings, investment sales, etc. If you have $125k in your KiwiSaver, savings of $25k and a further $5k sitting in your online share trading account, the total sum your family will receive on the event of your passing will be $155k.
Using the examples above, a rough approximation of the life insurance cover needed: $900k – $155k = $745k.
Your life stage
Over your lifespan, what you earn, spend and save, as well as your assets, will change and could impact the level of insurance cover that may be suitable.
For example, if you are older and have many assets to pass on through an inheritance based on your will and overall estate planning, your family may be less reliant on a payout from a life insurance policy.
On the other hand, you may be at a life stage (such as being a single parent or family breadwinner) where providing for your loved ones via an insurance benefit in the event you become seriously ill, disabled or die is of high importance.
Your budget
Of course, your budget – both now and into the future – is an important part of long-term financial planning. If you opt for a high level of life insurance cover, you must be sure that you’ll be able to afford the premiums.
What can impact my life insurance?
The level of cover you need is just one of the many factors you need to take into account when purchasing life insurance. Your choice of insurer, the policy details, other factors that are unique to you and any exclusions that may apply can all impact your premiums and eligibility for life insurance income protection.
1 Choice of insurer
The level of cover available and the premiums charged will differ depending on your choice of insurer. This is why it can pay to shop around for the best deal.
2 Policy details
Reading the product disclosure statement (PDS) for your life insurance policy will help you better understand any terms and conditions that may apply. Look for details, such as:
- What’s covered and what’s excluded under the policy
- What information you’ll need to give an insurer
- Information on premiums and how they change over time
- Waiting periods before you make a claim
- How to make a claim
3 Factors unique to you
These can include:
- Age
- Gender
- Smoking status
- Health and medical history, including any pre-existing conditions
- Job and any associated risks
- Pastimes and hobbies
- How you purchase your cover (e.g. direct from an insurer, or via a broker or financial adviser)
- Choice of cover, e.g. if you bundle life cover with TPD, trauma cover or income protection
- Amount of cover you take out
4 Exclusions
Common exclusions for many life insurance policies include deaths/injuries caused by:
- Suicide
- Riot or political coup
- Criminal activities
- Terrorist acts
- Travel to a country with a do-not-travel warning from government authorities
- War
- HIV/AIDS
- Abuse or influence of drugs or alcohol
- Risky activities
Your job can impact life insurance costs
Your job and its associated risks can impact the cost of life insurance premiums. For example, if you’re a forestry worker or builder, you are likely to be quoted higher premiums than if you worked a sedate office job.
Age impacts life insurance costs
As you get older, your life insurance costs will also generally increase.
About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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