Life insurance can be a confusing topic and it’s sometimes hard to know where to start, but it is incredibly important. How would your family cope if the unthinkable were to happen? Imagine not knowing where the money will come from to pay for your family’s day-to-day expenses and maintain the standard of living that you’re used to. That’s where life insurance comes into play. It can ease those fears, allowing your family to financially survive during an incredibly stressful time.
How Does Life Insurance Work?
Life insurance is a policy that provides a lump sum payment to cover life expenses upon the insured person's death. Policyholders pay regular premiums, typically monthly or annually. In the event of the insured person’s passing, a claim is made, and the nominated beneficiaries receive the sum insured to cover life costs, easing the financial burden during a difficult time.
Do I need it?
Before taking out life insurance, you should consider:
- Your Needs: What type of lifestyle do you want your family to have after you are gone? Do you have financial commitments such as a mortgage or car payments that would be difficult to keep up with? Having Life Insurance can help your loved ones retain the lifestyle you have provided for them.
- Premiums: It’s important to land on a premium you can afford, as you’ll need to keep up with payments to ensure your cover stays in place.
- Policy Terms: Understand the policy terms, including waiting periods, coverage limits, and exclusions.
- Beneficiaries: Decide who will receive the policy payout.
- Inflation: Consider the future cost of living in New Zealand. Will the coverage amount you take out now be enough to cover your family’s cost of living when the time comes, or will your loved ones need to sacrifice their lifestyle?
When should I take it out?
When you should take out life insurance depends on individual circumstances and needs. It may be a good time for you to take out a policy when:
- You’re at a younger age: Applying at a younger age when you are generally healthier and have not acquired any health issues means you are more likely to be able to get life insurance and the premiums should be cheaper.
- When your budget allows: When you can comfortably afford the premium payments without straining your budget.
- You’re have no other financial options: If you have shared debts or lack alternative means, like savings to cover life expenses after you are gone.
- Peace of Mind: When you want to ensure your loved ones are financially prepared to afford life without you.
- It's essential to carefully assess your financial situation and priorities before deciding when to take out life insurance.
What are the benefits of life insurance?
Life insurance offers peace of mind by providing a financial safety net to help cover life expenses. It eases the burden on loved ones after your passing. Life insurance is often used to help pay off the family home and other debts to make life easier for those you leave behind. It can also provide a legacy for your children to help them in the future, such as paying for their education or helping them get their first car or home.
How long does the policy last?
A lifetime insurance policy lasts for the whole of your life, as long as premium payments are paid. This means that if the policyholder passes away and the policy is in force, it will provide a death benefit to the policy holders family when the time comes.
How much does it cost?
The cost of a life insurance policy is determined by several factors, including:
- Age: How much you pay depends on your age. Younger individuals often pay lower premiums, as they are considered lower risk for the insurer. As you get older and your risk increases, so too do the premiums.
- Coverage Amount: The sum insured (the amount beneficiaries will receive) directly affects the premium; higher coverage amounts lead to higher premiums.
- Gender: In some cases, gender may impact premiums, with women often paying lower rates due to longer life expectancy.
- Smoker Status: Smokers tend to pay higher premiums because of the increased health risks associated with smoking.
- Health Status: Your health at the time of application will affect your premiums. If you have any pre-existing conditions, you may not be covered for death as a result of these conditions, or your premiums may be increased due to the increased risk these conditions pose.
- Waiting Period: Some policies have a waiting period before full coverage begins, and premiums may be lower if this waiting period is longer.
It's crucial to carefully evaluate these elements to choose a life insurance policy that aligns with your financial needs and circumstances.