What is Life Insurance?

Life insurance is one of those things that many people know they should probably have but they’re not quite sure what it does, how it works, or whether it’s actually relevant to them. This article breaks it down in clear, everyday terms to help you understand the basics before you decide if it’s something worth exploring further. 

What is Life Insurance? 

Life insurance is a type of financial protection. It is designed to pay out a lump sum of money if you pass away, or if you are diagnosed with a terminal illness and expected to die within a certain timeframe (as defined in the policy). 

That lump sum is paid to the person or people you’ve nominated often a partner, children, or family member or to your estate. It can be used however it’s needed: to pay off debt, cover living costs, support children, or ease the financial burden during a difficult time. 

How does Life Insurance Work? 

In New Zealand, most life insurance policies are what’s called term life cover. This means your policy provides cover for a period of time often up to age 65, 70 or 80, or as long as you keep the policy in place. 

Here’s what that generally involves: 

1. Choosing the cover amount 

You decide how much cover to apply for. This amount, known as the sum insured, could be $100,000, $500,000, or more. Some people base this on their mortgage or income, while others think about the legacy they would like to leave or the support their family would need if they passed away. 

2. Paying premiums 

Premiums are usually paid monthly or annually. The amount you pay depends on several things, including your age, health, smoking status, job, and how much cover you are applying for. Generally speaking, the younger and healthier you are when you apply, the lower your premiums are likely to be. 

3. Naming beneficiaries 

Some policies allow you to name a beneficiary, the person who will receive the payout if you die. If you have not named one, the funds are usually paid to your estate. 4. Making a claim 

If you die while the policy is active, or if you’re diagnosed with a terminal illness (and meet the criteria in your policy), a claim can be made to the insurer. Once the claim is approved, the payout is made as a tax-free lump sum. 

Common types of cover 

It’s easy to confuse life insurance with other types of personal cover but they are each designed for different situations. 

These covers can be held separately or combined depending on your circumstances and what you want protection against. 

This article is for general information purposes only and does not constitute personalised financial advice. The content is based on information current at the time of writing and may be subject to change. 

Lifetime Group Limited is a licensed Financial Advice Provider. For advice specific to your situation, please speak with a licensed financial adviser. You can view our Disclosure Statement here. 

All investments involve risk and are not guaranteed. Any examples or projections are for illustration only and should not be relied on as advice. 

Q: What’s the difference between term life and whole-of-life insurance?

A: Term life insurance provides cover for a specific period (e.g. to age 65 or 80). Whole-of-life cover lasts your entire life but is less common in New Zealand and generally more expensive. 

Q: Is life insurance tax-free in New Zealand?

A: Yes. In most cases, the payout from a life insurance policy is tax-free to the beneficiary or estate. 

Q: Can I have more than one life insurance policy?

A: Yes, it’s possible to hold multiple policies — for example, through work and personally. However, you need to check if there is any duplication or your cover amount exceeds the risk the insurer (or re-insurer) is willing to take on one client. You should always seek advice when you have multiple policy's to ensure at claim time you are covered across both. A financial adviser can help ensure they work together effectively. 

Q: Does life insurance cover suicide?

A: Most policies include a stand-down period (often 13 months) during which suicide is not covered. After that period, cover generally applies — but always check your specific policy wording. 

Q: Can I get life insurance if I’ve had health issues?

A: Possibly. Insurers may apply exclusions or increase premiums depending on your medical history. It’s best to discuss this with a licensed adviser, who can help navigate the options as different insurers offer different terms depending on your health. 

Q: What happens if I stop paying my premiums?

A: Your cover will lapse, which means you’ll no longer be insured. It cannot be put in back in place easily if this happens as there may have been a change to your health since you took out the policy. If you want to cancel, it’s important to understand the implications — especially if your health has changed since taking out the policy. 

Q: What happened to my Life Insurance policy when I die? 

A: This depends on the ownership of the policy. If the policy is owned in jointly (ex by the deceased and their spouse) then the proceeds will go to the surviving owner. If the policy is owned by an individual only (the deceased) then the policy will form part of their Estate.