Life and Income protection Insurance 


Why should I think about life insurance?

Most people with a family or debts should consider taking out life insurance. In exchange for a relatively small annual premium, a lump sum (the sum assured as specified in your life insurance policy) is paid out in the event of the death of the policyholder - or in some cases, if the policyholder becomes terminally ill.

Life insurance can cover the costs of your debts (including your mortgage), funeral expenses, and living costs for the surviving family members. Even if you aren’t the main breadwinner in your family, it can still be worth having life insurance to cover the non-financial ways in which you contribute to your family’s wellbeing.

There are two main types of life insurance:

  • Term life insurance – the cover is for a specified period of time (e.g. until you are mortgage-free, or your children have grown up), and the money is only paid out if  you die within that period.

  • Whole-of-life insurance – the cover does not have a specified period but cover is available until death. It is usually a combination of life insurance and a savings or investment plan. They generally cost more than term life policies.

What factors influence the cost of my life insurance policy?

The insurance company will ask you about your age, sex, occupation, lifestyle and health – as these are all risk factors which affect the probability of a claim.

For example, you’ll probably pay a greater premium if you’re a young male, a smoker, or engage in high-risk activities (e.g. you work as a top-dressing pilot, or list abseiling as a main hobby).

Depending on the insurer, you may be ineligible if you are over a certain age, have certain medical conditions, or work in a high-risk occupation (this also applies to income protection insurance).

You can’t do much about your age or gender, but if you want to spend less on your life insurance, you could consider:

  • Giving up smoking, or never starting in the first place
  • Participating in regular exercise
  • Achieving, and maintaining, a healthy body mass index (BMI)
  • Changing your job, if it is considered dangerous
  • Getting a joint policy with your partner, if you have one
  • Getting other types of policies with the same insurer
  • Paying your premium annually rather than monthly or fortnightly
  • Buying your insurance online rather than in person or via a broker


What kinds of insurance can cover my mortgage repayments in case my financial situation changes for the worse?

Mortgage protection insurance
You can take out a mortgage protection insurance policy. Depending on the policy, it can cover your mortgage repayments up to a maximum period of time if you are made redundant, can’t work because of illness or injury, or go bankrupt (if you are self-employed). It can pay off your mortgage if you die, or pay you a lump sum if you develop a serious illness.

As with health insurance, you may not be covered for any pre-existing conditions which stop you from being unable to work.

Life insurance
You can get a life insurance policy to cover the repayment of your mortgage (and any early repayment costs) if you die or, depending on the policy, become terminally ill. But it won't cover your repayments if you lose your job.

Income protection insurance
If you want general cover in case you lose your ability to earn an income, you can consider income protection insurance (see the next question).

Because policies can vary greatly from one insurer to the next, it pays to talk to at least three insurance providers and read the policy documents carefully. If you don’t mind paying extra fees (usually charged as a higher premium), it could be worth asking an independent insurance broker to research your options.


I want to protect my income in case something happens to me. How can I do this?

ACC will probably cover you for loss of earnings resulting from an accident (more about this on the ACC website). However it won’t cover you for loss of earnings due to illness.

Income protection insurance will cover you if you can’t work due to illness or accident. It’s also known as disability insurance because most policies do not cover job loss due to other factors (e.g. redundancy).

As with health insurance, you may have to sign a clause giving the insurer permission to check your medical history. If you have to claim on it (and are successful), you’ll get a monthly benefit or allowance for a specified period of time.

You should regularly review your policy, so that it keeps up with changes in your situation (e.g. your age, income level, financial commitments).

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What should I consider when buying income protection insurance?

Cover period
When buying income protection insurance, you’ll need to think about what period of time you want to be able to receive insurance payments, if you have to claim. The usual choices are two years, five years, until age 60, 65 or 70. A single policy may have different cover periods for different situations.

Your health
If you have a pre-existing medical condition, you may have to decide whether to pay a higher premium so that it is covered, or agree for it to be specifically excluded. This also applies if you have suffered any depression, anxiety or other mental illness. You can read more about insurance and mental health in this Consumer article. Income protection insurance policies do not necessarily cover all the possible health conditions which could stop you from working. So it’s worth checking carefully when you are deciding between policies.

Policy wording pass back
Some insurers have ‘policy wording pass back’ in their policies. This means that after you buy a new policy, you’ll be notified of any wording changes made in the future e.g. in its definition of a heart attack as an event you’re covered for. (The wording of your policy can mean the difference between having your claim accepted, and having it declined.)

Wait period
You may be able to reduce your premium by agreeing to a longer ‘wait period'. For more information see What is a wait period?

Optional add-ons
Depending on the insurer, you may be able to choose add-ons and other options for your policy, such as:

  • cover of your KiwiSaver contributions – so they continue while you are unable to work
  • cover for specialists’ fees
  • children’s benefit – which you receive if one of your children becomes sick or injured
  • automatic increase of the benefit amounts, according to the Consumer Price Index (CPI)
  • redundancy cover – payments for a specified period of time if you are made redundant (this option is not very common)
  • trauma cover – which pays you a lump sum if you experience a stroke or other critical medical condition
  • cover of the costs of keeping your business running while you are unable to work

Cover if you are unable to work at all, or unable to work fulltime?
Check whether the policy will pay out if you are still able to work, but only on a part-time basis.

Some policies will pay you if you are unable to work in your usual job - but many policies will only pay you if you are unable to work in any job. Your ability to work would be assessed by the insurer when you make a claim, and at regular intervals while you are receiving the payments.

Indemnity vs Agreed Value
Decide whether you want an indemnity policy or agreed value policy:

  1. If you have an Indemnity policy - The payment is set at a specified percentage (usually 75%) of your income. The amount of your income is usually either what you earned in the 12 months prior to your claim, or what you earned in your best 12 month period in the 3 years prior to your claim. Most income protection insurance policies are indemnity policies.
  2. If you have an Agreed Value policy – You’ll receive an amount agreed to between you and the insurer. This option is particularly useful if you are self-employed and keep your income artificially low. You’ll probably need to provide evidence of your income when you sign up. 
  3. A third type is a combination of the above.

Offsets, taxes, and benefits
You need to know that your income protection insurance payments will be reduced if you are receiving ACC payments for the same injury, or payments from any other insurance policy which covers you for the same injury or illness. Because your insurance benefit counts as income, it may be subject to taxation. It can also affect your eligibility for Work and Income support.

Help with deciding
With all these options to choose from it can be quite hard to work out which is the best one for you. Many insurers have an online calculator which you can use to work out which policy might best suit your situation; otherwise you can ask your insurance company or broker to explain your options to you.


What is a ‘wait period’?

There is normally a ‘wait period’, which is the amount of time you’ll have to wait until you can start receiving the benefit (allowance paid as a result of claiming on your insurance policy). Depending on the policy, it can range from two weeks to 120 weeks.

If you can choose the wait period for your policy, you'll need to decide how long you or your family would be able to get by, before you'll need the insurance benefit. A longer wait time usually means a lower premium, so you'll also consider this when deciding on the length of the wait period.


Can income protection insurance cover me if I lose my job?

Most income protection insurance policies only cover job loss as a result of illness or injury, though you may be able to add a redundancy option to your income protection insurance or life insurance (depending on your policy).
 
Mortgage protection insurance
Mortgage protection insurance policies do cover for redundancy – but it won’t be very useful if you don’t have a mortgage.

Redundancy insurance
A few insurers offer redundancy insurance as a standalone product. If you have redundancy insurance and are made redundant, you will receive payments for up to a specified period (which can vary between two months and 6 months) or until you find another job. The amount of your payments will be either a percentage of your pre-redundancy income (based on proof of income which you supplied when you bought the policy), or an agreed amount.

There will probably be a ‘wait period' before your payments begin, and in general you won’t be able to make a claim until a specified period after your policy commences. There may also be a limit to the number of claims you are allowed to make.

It’s worth noting that your cover is likely to exclude job loss through voluntary redundancy (where you choose to leave your job during a restructure).

If you don't want to buy an insurance policy, consider setting up a savings account and putting away a portion of your income each payday. See our page on Investment.


What is credit card repayment insurance and do I need it?

Credit card repayment insurance is usually offered when you get your credit card, or you can request it from your credit card provider.

It covers a portion of your repayments over a specified period of time, if you can’t work due to illness, accident, terminal illness, redundancy or permanent disability, or if you become bankrupt or die. In some cases (e.g. if you die) the whole of your credit card debt could be repaid.

The premiums are automatically charged to your credit card each month, and are usually linked to the amount of your debt each month. This means the premium will vary from month to month – and could be expensive if your credit card debt is large.

Occasionally credit card repayment insurance is automatically set up for you when you apply for your credit card; if you don’t want this insurance you can ask the credit card provider to cancel it.