Bolster Risk Management – Simplifying financial risk, insurance and investments for you.

Life Insurance – it is pretty boring

Buying life insurance is not like buying a pair of sexy shoes. You can’t wear your life insurance policy like a fashion item. You can’t drive it like a new car from a dealer. You can’t eat it like fine food at a restaurant. No, life insurance is pretty boring.

Key Takeaways:

  • You may not like it, but you need it.
  • Types of cover
  • Pricing examples

You may not like it, but you need it.

Don’t take my word for it. I’m a financial adviser making my living selling life insurance. However, the Financial Markets Authority (FMA) don’t sell insurance, they regulate people like me. This is what they have to say:

Buying life insurance is one of the most important financial decisions you’ll make. If there are people who depend on you financially, you may need insurance to protect them.FMA.govt.nz

There you have it. Nice and simple.

Only 38% of people have life insurance. Only 19% of people have trauma cover. Only 14% of people have income protection. We know this because another independent body, The Financial Services Council, do a lot of research on this very topic. We are one of the worst countries in the OECD for having financial risk protection.

Types of Cover

The definitions here in New Zealand do not always correspond to other parts of the world. Read your policy document if you are unsure.

Whole of life (& Endowment/ investment) – You don’t see too many of these in New Zealand. They used to be very popular as they gave clients an investment component to their policy.  There can be confusion over the definition, so if you have one, read the policy. The concept of ‘Whole of Life’ is that you are covered for as long as you pay the premium. However, and somewhat confusingly, this definition is also applied to what we call “YRT” in the industry, Yearly Renewable Term. The key distinction is to determine if your policy has an investment component. Sometimes the premium is level (or fixed) with a guaranteed interest rate on the investment component (which can be drawn down).

Term life – The idea with term life is that you have it for a specific period (such as 20 or 30 years). Again, this definition doesn’t really apply with most of the contemporary policies in place in New Zealand. Many of these policies will continue as long as the premiums are paid (which means that the policy is ‘in force’). These policies are pretty straight-forward, they pay a lump sum in the event of death. Many (but not all) will also have a terminal illness benefit.

For the term life policies, you have options on how the premium is structured.

Yearly Renewable Term (YRT) – as the name implies, renews the ‘contract’ every year. The policy is re-priced every year. So you will see the cost of your policy increase every year.

Level Pricing – You can elect to have a policy that ‘fixes’ the price for a set period, maybe for 10 years or to the age of 65. Different providers will give you different options. Not all Level products are the same, so speak with your adviser about these differences. These policies can end up saving clients thousands of dollars over the life of the policy.

I’m not going to look at funeral cover and some of those lower-end products. Nor am I discussing the fly-by-night covers that only insure for an accidental death that is very specific. There is a company that springs to mind that appears to prey on the uninformed and particularly on poorer neighbourhoods. There are also some other types of premium structure, such as one that will decrease the cover over time while maintaining the premium.


Pricing Examples

Giving pricing in a generic way is always problematic. However, I constantly come across people who assume that life insurance is more expensive than it actually is. The purpose of the two examples below is to indicate that even a modest insured amount can be affordable for less than a cup or two of coffee a week.

  • Brian 45, non-smoker on $250,000 life, YRT, would be around $8.00-$9.40 a week
  • Julie 30, non-smoker on $250,000 life, YRT, would be around $2.50-$3.50 a week

Life insurance may be boring, but for the price of a coffee or two a week, it is probably worth it.

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