Life Insurance

Why Do I need Life Insurance?

Life insurance has long been a part of estate planning in New Zealand. Although life insurance does not need to be a part of everyone’s estate plan.  It can be useful, especially for parents of young children and those who support a spouse or someone with a disability. In addition to helping to provide for dependents, life insurance can help provide immediate cash at death. Life Cover proceeds are a valuable source of funds to pay the deceased’s debts, funeral and other expenses left behind.

People who have no children or adult dependents might not need life insurance. Below you’ll find questions to ask yourself to help evaluate your life insurance needs. If you decide it’s for you, you should know exactly what you’re buying and choose the best type of policy for your circumstances. And, of course, you should buy no more than you actually need.

This essential form of protection is used for a variety of purposes:

  • Mortgage commitments
  • Personal debts, such as loans or credit cards
  • Security for business obligations (shareholder buy-outs)
  • Providing a lump sum to fund your family’s future lifestyle in the event of your death
  • Policies typically come with some important benefits at no additional cost. You can also add one or more optional benefits.

We also have an alternative Life Cover option, Survivors Income Cover which we’ll discuss later.

Long-Term Needs

To decide whether it makes sense for you to buy life insurance to provide financial help for family members over the long term, consider these questions:

Right now, how many people depend on your earning capacity? If the answer is “none,” you probably don’t need life insurance at the moment.

If you do have dependents, how much would they need for living expenses? One way to establish this amount is to look at the earned income that you bring to your household on a regular basis. Make it an annual amount,and multiply it by how many years worth you think they would need (to pay off the mortgage etc). From that amount, subtract the value of property if any they would inherit and any other assets.

How long would it take for your dependents to be come self-sufficient? If your children are almost out of school, they might not need much additional income.  However would you like them to go onto university and not have a student loan? If they’re younger, remember that dependent spouses caring for young children can usually return to work at some point.

Once you perform the calculations, you could find that your dependents might need little additional income from life insurance. But if you have young children, you may find that it makes sense to buy a decent and affordable amount of life insurance.

Life Insurance Cover

Short-Term Needs

Now, assess whether you need life insurance for immediate and short-term needs:

Are there any assets that will be available to take care of your dependents’ immediate financial needs? You might have savings in bank accounts and other cash-out assets.

After you die, how long will it be before your assets are turned over to your beneficiaries? If most of your property will avoid probate, there’s usually little need for life insurance for short-term expenses, unless you have no bank accounts or other cash assets. By contrast, if the bulk of your assets are transferred by will and therefore tied up in probate (usually for months, often years), your family and other beneficiaries may need immediate cash that life insurance can provide. While in probate, the courts will often allow a a family allowance of sorts. Otherwise they may allow a spouse or other inheritor access to estate funds, it is often a good idea to have life cover proceeds available.

Will your estate have substantial debts after your die? Estate lawyers call in assets that can quickly be converted to cash “liquid.” If your estate has almost all “non-liquid” assets (real estate, collectibles, business shares, jewelry etc), there might be major financial losses if these must be sold quickly to raise cash to pay bills. As opposed to what they could be sold for later if there had been enough funds from life cover available. Obviously, if your estate has significant funds in bank accounts or other immediately available assets, you won’t need cover for this purpose.

Avoid Probate on Life Insurance

Avoiding probate – the proceeds of life insurance policies are not subject to being tied up unless an estate has been named as the beneficiary of the policy. If anyone else, including a trust, is the beneficiary of a policy, the proceeds are not included in the estate and it can be quickly transferred to survivors with little hassle, cost, or delay.  The policy owner, often a spouse can provide evidence of death to the insurer to satisfy a claim and immediate payout. Except when your estate will have no ready cash to pay anticipated debts and taxes, there is no sound reason for naming your estate, rather than a person, as the beneficiary of your life insurance policy.

Business Needs

If you are the sole owner of a business, will it still continue and how much cash will it need when you die? Do you want and expect that some of your beneficiaries will continue the business? If so, do you think there will be enough immediate cash flow for them to successfully maintain the business? You may need insurance proceeds to cover any cash flow shortages that the business will no doubt experience after your passing.

Example: Jack owns several valuable pieces of real estate property and a profitable laundromat operation, but he has very little cash and no life insurance. When Jack dies, he has debts of $75,000 (apart from mortgages). To raise this money, his beneficiaries (technically, his executors) must sell some of his real estate or the laundromat business. Unfortunately, the country is suffering a recession, and the market value of both the business and real estate is down. To make matters worse, real estate agents are spreading the word that this is a “distress sale” to raise money for financial obligations. subsequently, the price the beneficiaries receive when they sell one of the properties is far below what they would have received had they been able to choose when to sell.

If Jack had purchased a life insurance policy with a payout at death for $75,000 or more, they wouldn’t have been forced to sell.

If your beneficiaries won’t continue the business, the questions are different: How much is your passing likely to affect the value of the business? Will there be enough cash to keep the business alive until it is eventually sold?

If you are one of several shareholders, life insurance proceeds can be used to buy out the others interests.

Other Links

See our full range of risk insurance products here.

Also, visit our sister site www.advice.co.nz for other helpful tips.