Life insurance buying guide

Here, we run you through the types of life insurance, what you should be covered for, and whether it’s worth getting advice from a financial advisor.

What is life insurance?

Life insurance covers your debts or your loss of income when you die, so your loved ones aren’t left in financial strife.

Why do you need life insurance?

Most people with children, or other dependents, need some life insurance in case of their untimely death.

At a minimum, life insurance should cover your debts, funeral expenses, full repayment of your mortgage, and your family’s immediate living costs.

You should also add in an amount to replace your lost income, until such a time as a surviving partner is no longer dependent on support.

What are the different types of life insurance?

The most common types of life insurance are term life and whole of life.

• Term life insurance pays you or your chosen beneficiaries the amount you are insured for if you’re diagnosed with a terminal illness or die before a specific time (generally within 25 years) or up to a certain age, like 72 years old.

• Whole-of-life insurance lasts for life provided you keep paying the premiums. Whole-of-life policies are more expensive than term life policies.

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 are:

• terminal illness cover: you can get an advance on all or some of the total you are insured for if you’re diagnosed with a terminal illness and have less than 12 months to live.

• funeral costs cover and bereavement support: your policy’s beneficiaries can apply for an advance to cover immediate costs after your death, such as funeral expenses, or counselling support.

• children’s funeral costs cover: you get a limited payment to cover funeral costs if your child dies from accidental injury; some policies also cover death from certain illnesses.

• increasing the amount you are insured for after major life events: you can increase the amount you’re insured for without having to provide further medical information if you experience a major life event. Although it varies from policy to policy, common events include getting married or divorced, having children or taking out a home loan.

• financial advice cover: you or your policy's beneficiaries can get financial advice (up to a limit) if the insurer pays out the policy amount.

These benefits will generally be paid for out of the lump sum you’re insured for.

When should you get life insurance?

If you have people who are financially dependent on you, it may be time to think about getting life insurance.

Big life events, such as buying a house, getting married or having kids, can be the impetus to start thinking of getting life insurance.

Some life insurance policies also include income protection, as well as payouts for serious illness or injury.

How much do I need to be covered for?

The amount you get covered for should be enough to pay off your mortgage, clear any immediate debts, and provide an income for your family.

One rule of thumb is to be insured for ten times what the highest earner in your family earns annually. This means the mortgage can be paid off and leave your family some money to deal with other expenses.

Use our calculator to give you an estimate of what you should be covered for.

Should I buy life insurance through a broker or advisor?

In Consumer NZ’s 2024 insurance survey, 35% of respondents bought their life insurance policy via an adviser or broker.

A further 34% bought direct from the insurer, either online or in person, and 15% purchased it from their bank.

A financial advisor can help you navigate insurance, and other financial obligations, and plan for your financial future.

We’ve written elsewhere about what a financial advisor does, as well as the questions you need to ask them before signing up for any policies or advice.

What do I need to tell the insurer?

When you apply for life insurance, you’ll need to answer a lot of health- and lifestyle-related questions, including whether you smoke or drink alcohol.

The insurer asks these questions to see how risky your lifestyle is and how much you may need cover for, which impacts how much your premiums will be.

It’s important you’re upfront and honest when answering those questions, because if you don’t disclose something that comes to light later, and the insurer wouldn’t have covered you if it had known, the insurer could void your policy and not pay out.

Even if it’s an accidental omission, it can be seen as being dishonest, which means the insurer doesn’t have to honour the policy.

Is life insurance affordable?

Most life insurance policies use a pricing method called stepped cover. This means the policy will get more expensive as you age because your risks increase as you get older.

Another form of pricing called level cover is also available. This locks in the premium price for a fixed term, up to aged 65 for example. However, once that term is up, policies revert to stepped cover, or the policy will need to be renewed, which means premiums could go up.

Level cover generally starts out expensive but stays at a fixed price for the term of the policy (e.g. until you’re 65), whereas stepped cover is initially cheaper but gets more expensive as you age.

What will work for you will depend on how long you need the life insurance policy for, and what you can afford over the long term.

Tips for buying life insurance

Here's our advice for before and after you have life insurance.

• Shopping for cover: get at least three quotes. Premiums can differ by hundreds of dollars. Ensure any pre-existing medical conditions are covered.

• Ask your insurer if there's anything in the policy that you're unsure about and get them to explain it to you. Make sure you do this before you sign.

• When you have insurance: keep the policy in a safe place – like where your will is kept, or with your lawyer – and let your partner or family members know about it.

• Every few years, review how much cover you need, particularly after major life changes, such as marriage or divorce, having children, paying off your mortgage or children leaving home and becoming independent.

• If you’re changing insurers, don't cancel your old cover until you have been confirmed as a customer of the new insurer.