Insurance
8 min read
Author: Darryl Scott
Darryl Scott, Insurance Adviser
“How much does life insurance cost? And do I really need it?”
These are the two most common questions people ask me as an insurance adviser.
So, in this article, you’ll get an honest analysis of how much life insurance costs, who needs it, and who doesn’t.
Now, you might think: “He’s an insurance adviser. He’s biased! Of course, he will tell me to get life insurance.”
But here’s the truth. Not everyone needs life insurance ... and not everyone should take it out.
So here are the signs you need (and don’t need) life insurance (plus how much it costs).
Life insurance is a safety net for your loved ones.
If you die or become terminally ill – your partner or children receive a big lump sum of money.
This is paid tax-free. So your family won’t have to share the payout with the government.
It’s simple insurance and has one of the more affordable premiums.
Some people can’t get life insurance, though. For instance, life insurance won’t pay out for an act of war or terrorism. So, I can't insure anyone in the military.
And if you're ringing me from Auckland Hospital asking to buy some life insurance in a hurry ... you'd probably get deferred.
When you take out life insurance, you get to choose the level of cover. This is the amount your family will be paid if you pass away.
For example, do you want your family to be paid $200,000 if you die. Or, will they need more?
It’s a hard one to answer, which is why many Kiwis decide to work it out with an insurance adviser.
But, to give you an idea, Opes Insurance developed the ‘Risk Reducer’. This is the minimum level of insurance we think most investors need.
If you follow the Risk Reducer, we generally think you should take out at least enough cover to:
More from Opes:
Some people need life insurance more than others. For instance, life insurance is most relevant if you have:
Here’s a table to illustrate when life insurance is more or less necessary:
For example, if you’re:
Then, you’re more likely to need life insurance.
That’s because if you or your partner dies, your family could be in dire financial straits.
Compare that to someone in their 20s who rents and doesn’t have children. They don’t have the same need for life insurance.
Keep in mind, that this table is just to give you an indication. It’s not formal insurance advice.
Our approach at Opes is to insure what you can’t afford to lose. For most people, that includes themselves, their incomes and their homes.
Life insurance is more affordable when you’re younger and healthier. Here are some examples to give you an idea of cost:
Rosie (35) is a stay-at-home mum to three kids (7, 4, 1). Her husband, David (36), is the sole earner, making $150k a year.
They have a $750,000 mortgage. If either dies, they want the mortgage cleared.
On top of that, Rosie will need money if David dies. That’s because he earns the income.
But David will also need money if Rosie dies. He’d need to hire a nanny to help to look after the kids. That costs money too.
So they decide to both take out $1.55 million in life cover. The cost for both policies is $34.50 per week.
Matt (21) recently bought a $750,000 townhouse as an investment property. He’s got a $550,000 mortgage on the property. That’s the only debt he has.
He’s single, has no dependents and rents. So he doesn’t feel he needs life insurance.
But if he wanted to get life cover, so if he died, he could leave his parents a mortgage-free home. It would cost him $11 per week.
John (57) has minimal debt, grown kids, and three properties. He’s got less need for life insurance.
But if he chooses to reduce his life cover to $30k – to cover funeral expenses – his premiums are $4.70 per week.
The cost of your life insurance (the premiums) changes based on how old you are and how much cover you take out.
For instance, as you age, the cost of life insurance increases. That’s because you’re more likely to need it sooner.
For instance, life insurance could cost 2.5x more when you’re 50 than when you’re 40.
That cost tends to ramp up when you near your 60s.
A 30-year-old male, non-smoker, professional might pay $15 a week for $1 million coverage. Whereas a 60-year-old could pay $155 for the same level of cover.
That’s one of the reasons many people decrease their life insurance as they near their 60s.
That’s because they’ve built more wealth and have more financial resilience ... and it starts to cost more.
They don’t have the same need for life insurance, so they gradually reduce their cover.
For example, Joe is in his 60s. He’s got a very low mortgage, and his kids have all grown up. So, he doesn’t need the same life cover that he did when his kids were younger.
Similarly, life insurance tends to be more expensive for men than women.
And if you smoke, the cost of your insurance will be even higher.
For instance, if you’re 40 and you smoke, your life insurance premiums could be 2.2x what they would be if you didn’t smoke.
Now, let’s go through the pros and cons of life insurance.
A major benefit of life insurance is that your insurer accepts you “as is” when you apply.
If you take out $1 million in cover at age 25 as a healthy non-smoker, that’s locked in. You can later smoke or develop a chronic illness, but your original policy terms remain.
That said, your premiums will rise annually as you age.
The reality is you either live a long life and never use your insurance ... or you pass away, and your family receives the payout.
So, it’s buying something you hope to never benefit from. Except for the peace of mind knowing your family will be financially looked after if you pass.
Not everyone needs life insurance.
But a lot of people do. Especially if you are in the middle of your life. That tends to be the stage where you have a lot of responsibilities e.g. Kids, mortgages, your partner.
It’s the stage where your family relies on you to earn an income. Because you might not have built a lot of wealth yet. So you need more life insurance.
But as your financial situation (and life) evolves, so should your life insurance.
To decide if you need life insurance, ask yourself these three questions:
If the answer to any of these questions is ‘yes’ … then it is worth talking to an insurance adviser.
This way, you can make sure you’re covered when you need it most and not over-insured when you don’t.
Darryl Scott, Insurance Adviser
Darryl Scott is an Insurance Adviser at Opes Insurance in Auckland with over 30 years of Industry Experience. Darryl provides personal risk advice and claims assistance for individuals, families or businesses that require a functioning plan to provide funds in the event of an untimely death or major illness or injury.
