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What is life insurance?
Life insurance is often used as a generic term to refer to a suite of insurance products to cover one and one's family if one dies or has a significant health event. Most people associate the term Life insurance with a policy which pays money when someone dies. However, in its broadest meaning life insurance also includes a suite of insurance solutions that provide protection for events which can occur while one is alive. These living insurances can financially support one if he/she suffers a specified life-threatening health condition or are unable to work due to sickness or injury. The most common living insurances are income protection and critical illness policies.
TYPES OF LIFE (Living) INSURANCE
The New Zealand financial services market provides the following types of life and living insurance policies.
- Life insurance (Term life insurance) These policies pay the sum insured if the insured person dies or is diagnosed as terminally ill with life expectancy less than the period set out in the policy (commonly 12 months).
- Trauma Cover (Critical illness cover) These polices pay the sum insured if the insured person suffers a specially defined serious medical conditions listed in the insurers policy document (e.g., cancer, stroke, heart attack). It doesn’t matter whether one can work or not and the sum insured can be used for anything the policy owner wants. It is not linked directly to medical costs or treatment.
- Total and Permanent Disability (TPD) cover These polices pay the sum insured, usually as a lump sum, if the insured can’t work because of sickness or injury, and it is unlikely that one will ever work again. Some policies will pay the lump sum if one is unlikely to work again in his/her usual or a similar occupation, and other policies will only pay one if he/she is unlikely to work again in any occupation.
- Income protection Pays a regular income benefit to replace one's usual income if he/she can’t work because of sickness or injury. Most policies pay a maximum of 75% of the income which was prior to stopping work. Depending upon the policy wording, benefit payments may be taxable, or non-taxable. One can choose a ‘waiting period’ before the insurance is paid (e.g., 4, 8, 13 or 26 weeks) and a payment period (e.g., 2 years, or until age 65) that will affect the premium amount to pay.
Personal risk protection solutions are available to help manage the financial risks associated with death, becoming disabled, or suffering a serious illness. If your family or anyone else relies on you financially, you may need to consider life insurance. If you are earning an income, then income protection insurance can provide peace of mind in the event you had to stop working due to a health issue
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Patrick Wang
