Do you need life insurance? What types of cover are there? We explain.
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Most people with dependants need some life insurance – just in case the unthinkable happens.
At a minimum, life insurance should cover your debts, funeral expenses, full repayment of your mortgage (including any early-repayment fee), and your family's immediate living costs.
As well, you should add in the amount required to replace a lost income, or pay for a caregiver, until the surviving family is no longer dependent on support.
Who are your dependants?
Life insurance isn't just for financial dependency. Consider the ways that you contribute to your family, and what you'd need to compensate for the loss of that contribution. This includes caregiving and childcare as well as financial support. It could also include the support you give to elderly relatives.
Our calculator provides an estimate of how much cover you need.
The most common types of life insurance are term life and whole-of-life:
As well as providing cover in the event of death, term life insurance policies usually have other built-in benefits. Five of the most common include:
Tip: Keep your policy schedule in a safe place alongside your will. Let your family know you have a policy.
Life insurance premiums can be structured in different ways:
If you’re interested in yearly stepped premiums, before signing up ask your insurer to give you a schedule of premiums for the next 5 or 10 years. While the schedule isn’t guaranteed, it’ll give you an indication of the amount you’ll pay over time. You can use the schedule to compare yearly stepped premiums against level term premiums for the same policy.
When you take out life insurance, your insurer relies on information you provide to calculate your premiums and the terms of your cover. You have a duty to disclose material facts that would influence the judgement of a prudent insurer. Material facts may relate to your age, your medical history, and whether you smoke.
If you understate your age, your insurer is entitled to reduce its liability to reflect the lower premiums you paid. If you fail to disclose other material facts, your insurer can alter the terms of your cover, cancel a benefit or “avoid” (cancel) your policy entirely. Your premiums may not be refunded if your policy’s avoided.
The upshot is you need to be careful when applying for, or renewing, your life insurance.
|Insurance providers (responses)||Overall satisfaction|
|AA Life (59)||53%|
|Foundation Life (83)||43%|
|Partners Life (125)||38%|
|Fidelity Life (168)||34%|
|Asteron Life (221)||29%|
Our survey took place in August 2018 and 2426 members participated. Insurers are those with 50 responses or more. Overall satisfaction shows the percentage who rated their insurer 8, 9 or 10 on a scale from 0 (very dissatisfied) to 10 (very satisfied).
You must pick a sum assured when you take out life insurance. This should be enough to pay off your mortgage, clear any immediate debts (such as funeral expenses) and provide an income for your family. Use our calculator for an estimate.
Some financial advisers selling life insurance could be putting quantity of sales before quality of advice, an investigation by the Financial Markets Authority (FMA) has found. And it’s consumers who’ll ultimately foot the bill.
In May 2015, the FMA compelled 12 insurers to hand over four years of life insurance data. The data showed advisers who were paid an upfront commission for selling life insurance were more likely to switch their clients to new policies after only a few years.
This practice allowed advisers to increase their income and receive bonuses, such as overseas trips. But it also increased industry expenses, which are likely to be passed on to consumers as higher premiums.
Worryingly, the FMA found the quality of a policy was only a minor consideration when advisers upsold clients. “This suggests that some advisers are acting in their own interest, rather than in consumers’ best interests,” the report stated. Learn more.