How Do Life Insurance policies work in NZ ?
That’s the BIG question. And we don’t have an answer for you.
But, as we are really talking about Life insurance, we do have a couple of things to tell you.
So, Life insurance! Probably the best-known and understood insurance covers available. After all, it’s pretty simple, isn’t it? You die – your family gets money!
And the answer is yes … and no.
The ‘yes’ part.
If you have Life insurance, on your death, the insured amount will be paid out by the insurance company.
The ‘no’ part.
The question here is - who will get the money? We’ll get to that in a bit because it can end up being complicated and if you don’t get it right it may not be the way you want it to be.
So, on my death will my insurance payout?
Dead is dead!
We know that sounds a little bit harsh but the reality is that, to your insurer, the manner of your death (age, illness, foul play, or accident) is not important. Just that you have been declared to be dead.
The only exception to this is suicide. But, even then, most insurers will pay out on a suicide, provided you have had your policy in force for more than 13 months. And we understand that 13 months is a strange time period but, apparently, the statistics say that more suicides happen on the first anniversary of some incident that can be the trigger for suicide. By pushing it out by just one month, it can give people time to rethink and maybe change their minds. Whether this is true or not is a matter of debate but insurance companies are driven by statistics and that is the decision they have made.
So, what will happen with my insurance when I die?
With most Life covers, when death has been confirmed, there will be a payout of around $15,000 within 24 hours.
“Hey, I have more cover than that!” Yes, you probably do. And this will be paid out.
But there can be some delays in making the full payment (this is part of the ‘no’ issue). To assist with all the costs of arranging a funeral and payment of immediate debts the insurer will make this interim payment to help smooth over some of the financial issues (which are really the last thing you want to be concerned about at that time).
Many insurers will provide this payment but you should check to make sure yours is one of them.
So, who will get the money?
Okay, this is where we get into some of the important technicalities and we will try to keep this as simple as possible.
You have an insurance policy. This means that you are what the insurance company calls ‘the life assured’. Simply put, it is your life, health, or wellbeing that has been insured.
Alongside this is “the policy owner”. The ‘policy owner’ may not be the one insured but they are the person that ‘owns’ the policy.
Now, the ‘life assured’ and the ‘policy owner’ can be the same person but that is not always the best way to structure it. And we will tell you why in a moment.
Hang on! It is my insurance policy and I pay for it!
And while you may be paying the premium, the insurance company is not concerned about where the money comes from (as long as they get it, of course). For instance, if you could persuade your neighbour or a complete stranger to pay for your policy (and, if you can, please let us know how) that neighbour or stranger would not benefit directly from any payouts from your insurance (because they are not the “policy owner”).
Now, as we said, you, as the “life assured” can also be the “policy owner” which makes sense for covers such as Trauma, Income or Mortgage Protection, and Health cover, because you should receive the money directly.
But things are a little different when it comes to death because the “policy owner” is the only person that the insurance company will pay anything to.
Obviously, if you are dead, as the ‘policy owner’ you can’t make a claim or sign anything. And the insurance company needs those legal documents to pay the money. If you look at it from their perspective, they could make a large payment to somebody and then, at a later time, find that another person is also making a claim to it. Suddenly, there are real legal problems and that is something they try to avoid.
Now let’s assume that you (the “life assured”) are also the “policy owner”. On your death, the insurance company pays out the money to the “policy owner”. You are dead and so this money now becomes part of your “estate” and your estate will have to go through probate.
With simple estates probate can be reasonably quick, maybe a case of weeks, but if your estate is complicated it can be months or even years until probate is granted. And until then all funds are frozen. And that can cause real problems.
But I have a Will saying where the money is going to go!
Great. Having a Will is really important to ensure that you have made your wishes clear.
And making a Will need not be that expensive. Of course, you can use a high charging legal company (and if things are complicated it may be worth the cost) but if it is a simple estate you could do your own Will (there are many internet sites that will give you a basic template). If you decide to do it yourself, we advise getting a lawyer to run their eye over it, to keep a copy (a Will is no use if nobody knows where it is!), and also to sign it as a witness.
With a Will, it is likely that probate will be quicker and that your wishes will be followed (but, believe it or not, there are still no guarantees there – this dying thing can be quite tricky!)
But if you die without having a Will (which is called being “intestate”) then the Courts will decide who gets the money. And that may mean it will not be going where you wanted. There are certain rules regarding the order of people that will benefit from your estate and, strangely, your partner or spouse may not be at the top of that list.
So, if you don’t have a Will in place, right now would be a good time to consider getting one done.
We can also provide you with our ‘ICE’ (In Case of Emergency) document. This is not a legal document (and does not replace having a Will) but will allow you to set out in writing exactly what you want to happen after your death – things like what sort of service, where you want the service to be held, who is going to be making the final decisions, even what clothes you wish to be buried (or cremated) in. Often your family and friends will not actually know what you really wanted (even if they think they do!) and this can cause stress and disagreements. Again, that is not really the best stuff to be going on at that time, and having an ICE document can stop this from happening.
We have created a simple template for you to follow and have outlined the major areas. But there will be things we haven’t thought about so there is room for you to add your own requirements.
If you want a copy, get in touch. Here’s the link firstname.lastname@example.org. Just put ICE in the message area and we will email it to you.
So why should you have Life insurance?
Here’s a simple truth – this is money that you are never going to see!
But if you have a family and children, in the event of your death, they are probably going to need some financial help. If your family relies on your income, which is now gone, a Life insurance policy will be vital. Maybe they will need to change their lifestyle, downsize the house or pay off a mortgage. A Life insurance policy gives them time to make these adjustments without having to rush at making these decisions. And, if you already have everything sorted (mortgage paid off, have enough savings) then maybe you want to leave some kind of inheritance for your kids to give them a start in life.
But if you are young and have no responsibilities why is Life policy any value?
Sadly, being young does not mean you are invincible. Death has no regard for age and it can come in many ways – illness or accident.
Now, ask yourself “If I die tomorrow who is going to pay for my funeral and take care of any debts (student loans, car loans, or credit cards) that I have managed to rack up?” Just because you are dead doesn’t mean these go away! The burden will probably ultimately fall on your family and, maybe, they have the resources to take care of them but what happens if they don’t? Is that something you really want to saddle your family with?
Being young means you won’t need as much Life cover (but you will probably need some Trauma cover – being young doesn’t protect you against the disease!) and the younger you are the cheaper it will be. It will probably be about the cost of a couple of coffees (or beers!) a week.
If you are later in life getting Life insurance can be more difficult and more expensive but, again, maybe worth considering.
If, because of your age or pre-existing conditions, Life insurance will not work or is too expensive there are several Funeral plan options available. While these may, initially, seem to be cheap and easy they would not be our first recommendation. But if everything else fails, they may be worth considering but be sure to understand the limitations on these policies (a blog on this subject is coming up).
So ultimately Life insurance is something everybody will need (and this is the only insurance policy on which you are 100% guaranteed to make a claim!) but make sure you understand exactly what you are getting, that it is structured correctly and that what you want to happen to the money will happen - because it will be too late when you are dead!