Life Insurance in New Zealand

Life insurance is a system of risk sharing. Many people combine to share risks that are too heavy for the individual to bear alone.

Commercial life insurance grew out of the need for people to have a system for sharing risk. The life insurance industry has built up a good deal of expertise in specialist areas.

For over 150 years life insurance has played an important part in the economic welfare of New Zealand and its citizens.

In the early days settlers bought with them life policies issued by British offices. The AMP Society was founded in Australia in 1849, and commenced operations in New Zealand in 1854. In 1869, the Government Life Insurance Office (now Tower Corporation) was established. Many more Australian and British offices followed, and new life offices were founded in New Zealand.

The New Zealand life insurance scene has seen a succession of mergers and rationalisations in over the years that has lead to many of the old company names disappearing. New offices have opened and American and European companies have also established offices in New Zealand.

Diversification in the industry has led to niche marketing with some smaller companies targeting particular sectors of the insurance market and specialist reinsurance offices have opened. Many registered banks have also established life insurance subsidiaries.

In 1990 over 60 offices were authorised to transact life insurance business in New Zealand.

Life insurance in New Zealand has been traditionally sold under the sole agency system, with an insurance agent writing business for one office only, but other agency systems have also been introduced.

These systems, which allow an insurance agent to introduce business to more than one life office, include open agencies, preferred agencies, and multilane agencies. In contrast, some banks and specialist insurers employ salaried salespeople.

Life offices invest their funds in a broad range of investment sectors, including 1. Mortgage lending; 2. Fixed interest investment in Government and public body stock; 3. Commercial property; and 4. Shares, both in New Zealand and international.

By investing part of their funds internationally, life offices diversify their New Zealand risk and can often provide better security and improved returns for their New Zealand policyholders.

There are four lifetime risks to an individual that can and should be insured against.

1. Dying too soon 2. Living too long 3. Becoming disabled 4. Serious Illness Dying to soon.

While you are young and don’t have any debt or dependents, insuring against dying to soon does not have much relevance, as once you are dead you won’t care and financially there are no ramifications to your loved ones.

But once you start building up assets, possibly funded by debt and create dependents, your untimely death can be financially devastating for those left behind that relied on you to pay the bills, mortgage etc. They could be out on the street if you don’t cover or insure against the risk.

As a basic rule I would suggest having life insurance cover (Life insurance pays out a one off cash payment if you die) of your total debt plus say five years of your income. This will mean all debts are cleared and the surviving spouse/partner can stay at home with the children until the youngest is at school.

The younger you are, generally, the cheaper the insurance premiums you will have to pay, as the risk of you dying is lower.

Having made a case for not having life insurance while you are young, some reasons why you would consider taking insurance out when you are young are;  Cost is relatively low  Can still leave a legacy, maybe to a charity  Get accepted with a life insurer with inflation adjusted cover  Arranged guaranteed acceptance of increased insurance cover as your risk level increase.

The fact is that one in seven of us will die during our working lives – that means before reaching 65.

Living too long How can living to long be a risk? While this is a risk, it is more a planning risk as failure to save sufficient to cover your requirements in retirement can mean you run out of money before you die.

When financial planners calculate how much you need to have saved to provide the income you want in retirement, they will factor in how long you are expected to live and sometimes reduce the amount needed to be saved by allowing some of the capital (principle amount saved) to be consumed over time. If however you live longer than expected and have depleted your capital then your standard of living is going to suffer. You have lived too long in relation to your planning.

“The average life expectancy of males and females is increasing”

See investing in the next section.

Becoming disabled.

Statistics tell us that one in three people will suffer a major illness or injury that will stop that person working for three months or longer. Can you afford to survive for three months without income?

With such a high probability that you could be the one of the three who lucks out it makes sense to cover this risk. Again while you are young no big deal, you can always bludge on the Olds.

Better yet, you could always take control and cover that risk by taking out income protection Income protection This insurance will protect your income level up to an agreed figure, usually 75 % of your current income. So, basically, if you can’t work because of an accident or illness the insurance company will step in when your employer stops paying you and your income stream is substantially maintained. After all, your expenses never stop because of your accident or illness.

Trauma Insurance This is a lump sum insurance where, if you get one of 26 specified illnesses, the insurance company will pay out the sum insured. This then would give you an option of getting specialised medical help that may help your recovery. The alternative is for you to take a punt on the public health system and where you join the waiting list.

Serious Illness You never know when you or your dependants will have a medical problem; coupling this with the escalation in the cost of medical services today presents another insurable risk to you. Health insurance gives you the ability to pay for the medical expertise and surgery without being reliant on our public health service.



Life Insurance in New Zealand - To learn more about this author, visit David Weusten's Website.

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