Life insurance exists to do one narrow job: pay a lump sum to the people who depend on you if you are not there to earn it any more. Everything else about the product, the policy name and the marketing aside, comes back to that single purpose. Once that is clear, deciding whether you need it and how much gets much simpler.
What life insurance actually does
Life insurance, often called life cover, pays a lump sum to your chosen beneficiaries if you die. In most New Zealand policies it can also pay out early if you are diagnosed with a terminal illness with a short life expectancy. The payment is generally received free of tax, and your family decides how to use it, whether that is paying off the mortgage, covering school fees, or replacing the income you would have earned.
It is important to understand what it is not. It is not an investment, and it is not health cover that pays for medical treatment while you are alive. Those are different products. The core idea of life cover is replacement: it stands in for the future years of income you would have provided.
Working out your sum insured
Your sum insured is the total lump sum the policy will pay out. There is no single correct number, but a sensible approach starts from two questions rather than a random round figure.
- What debts and costs would land on your family? The mortgage balance is usually the biggest item, followed by any other debts, funeral costs and unpaid bills. Add these up: they are obligations someone will have to meet.
- How much income would your family lose? Multiply the after tax income you provide by the number of years you want it replaced. This is the longer tail of the calculation and where many people take a view on how many dependent years remain, rather than replacing every dollar forever.
You can set a level sum insured that stays the same, or a reducing policy that tracks a falling mortgage balance. The right choice depends on your goal. If your aim is to clear debt, a reducing policy can fit neatly. If your aim is to protect income for a fixed period such as until children finish study, an even sum insured is often more appropriate.
Because a life policy may pay out decades away, sizing your cover is a judgement call, not a formula. An adviser can help you work through the debt and income figures against your actual situation. Whatever you settle on, it is worth reviewing the number when your mortgage, family or income changes, because cover that made sense at one stage of life rarely stays right forever.
Term vs whole of life
New Zealand life insurance mainly comes in two forms, and the difference matters far more than which brand you buy from.
- Term cover pays out only if you die during the term, typically a set period like 10, 20 or 30 years, and builds no cash value. Because it covers only a defined window, it is usually the cheaper way to get meaningful cover. It is the workhorse for covering a mortgage or for protecting children until they leave home.
- Whole of life stays in force for your whole life as long as premiums are paid, and the lump sum is guaranteed to be paid eventually. Because the insurer almost certainly has to pay, premiums are higher. Some policies build a cash value you can borrow against, but you also commit to the premium for decades, so the ongoing cost is real.
There is no objective winner, only a fit. Most households protecting a working period reach for term cover, because it delivers the most cover per dollar of premium. Whole of life appeals more to people who want a guaranteed legacy or who expect to hold the policy long term regardless of life stage.
When you actually need it
The honest answer is that life cover matters most when someone depends on your income. You probably need it if you have:
- a partner or children who rely on your pay,
- a mortgage that someone else would be stuck with,
- or debt co-signed by another person.
You may need less, or none, if you have no dependants, no significant debt and enough savings for your own estate to cover its costs, or if a partner could comfortably carry the household on their own income. Many people also hold some cover through their employer, but that generally ends when the job ends, so it is not safe to rely on alone.
If you decide to buy, the practical pitfalls are simple. Disclose your health honestly at application, because what you fail to disclose is exactly what an insurer can rely on to decline a later claim. Compare the definition and the exclusions, not just the premium, because two policies can cost the same and cover very different sets of events. Get cover through a licensed adviser or a provider you can verify.
Life insurance replaces income and clears the debts your family would inherit. Size your cover to the debt plus the dependent years, prefer term cover for most households, and be honest in your application. If you are wondering how this fits beside cover for medical treatment while you are alive, our guide to health insurance in NZ covers that, and income protection and trauma cover explains the policies that pay while you are still working.