Is life insurance really worth the money?

The potential payout far outweighs the cost

For most New Zealanders, creating a safety net for those unexpected emergencies is high on the priority list. But with competing financial demands, it can be hard to know where to put your money to get the best out of it.

Most people overestimate the cost of life insurance (and underestimate the value). The cost – and the level of cover – depends on several factors, but is life insurance generally worth the money?

Again, this all comes down to personal circumstances and outlook, but saving a few dollars here and there instead of paying for life insurance won’t make you any richer. Here’s why.

First, here are the basics

Life insurance usually pays out a lump sum or monthly income (tax-free) to your beneficiaries if you die unexpectedly within the policy term. Your beneficiaries can choose how they spend it, but most people usually use it to pay off their home loan or other debt or cover household bills and general living costs like childcare and groceries.

Premiums are calculated using factors such as your age, health, occupation and how long you want the policy to run. They will also depend on the type of policy you want.

So, is life insurance worth it?

The answer to this question primarily depends on whether you have anyone who relies on you financially. For example, children, a spouse or partner and even a parent.

Life insurance is a particularly good idea if you have a mortgage that would still need to be paid if your income was to suddenly disappear. But there are other (rising) costs that should be considered too – think utility bills, petrol and groceries.

Here are some of the ways life insurance can be used by your family:
• Income replacement for years of unexpected lost salary
• Paying off debts such as car loans, credit cards and student loans
• Providing funds for your children’s education
• Helping with care for aging parents

If you already have life insurance, certain milestone events such as getting married, having children and buying a house may also warrant upping your level of cover. While this may trigger higher premiums, these should be weighed against the financial security an appropriate level of cover can provide.

While premiums depend on several factors, in some cases, life insurance could be cheaper than you might think, and the potential pay-out a lot higher than the accumulated amount you pay over the policy term – even if you were to put aside that money in a savings account for a rainy day.

Pros of life insurance:

• Pay a little, get a lot.
• A pay-out is tax-free in most cases.
• Your family can receive the payout quickly after your death to cover immediate needs.

What happens if you don’t have life insurance?

Without life insurance in place, anyone you leave behind could have crippling financial worries at an already distressing time. It’s also good to note that the vast majority of life insurance claims are paid. As of February 2022, the life insurance industry had paid out much more than its usual annual budget due to the effects of the global pandemic.

However, it’s unlikely you’ll need life insurance in the following scenarios:

• You have no dependents.
• You already have adequate cover, through your employment for example.
• Your partner can afford to look after your family if you’re not around.
• You have another financial safety net, such as adequate savings or an investment property that can be sold.
• You qualify for government benefits as you’re a low-income earner.

You won’t ever be poorer for taking out life insurance

Life insurance will give your loved ones access to money when they need it most. This means they can continue their lives with a clean financial slate and maybe a little cushioning – making a huge difference to the stability of their financial future. A life insurance policy won’t supplement your retirement, but it’s worth buying because it will give your family a large sum of tax-free money if you die unexpectedly. Over the life of a policy, life insurance costs exponentially less than the amount your family would receive if you died.

If you have people who depend on you for financial support, talk to an insurance advisor at Global Finance today about the best life insurance policy for you.

**Underwriting criteria and insurer terms T’s and C’s apply