Six biggest life insurance mistakes Kiwis make

Common mistakes can leave family members in the lurch.

Do you have life insurance? Unless you're single and don't care what happens to your body and debts when you die, then you probably need some and possibly quite a lot of insurance cover.

The problem is, says David Boyle, general manager of investor education at the Commission for Financial Capability: "People don't wake up and think, 'I need to buy some life insurance today'."

Life insurance is generally something that comes up because of an event, such as getting a mortgage or having children. It's very easy in those circumstances to make mistakes.

I decided to look at the six biggest life insurance mistakes Kiwis make and ask industry players to explain them:
 

1. Not taking out life insurance or putting it off

It's better to have insurance and not need it, than to need it and not have it, says insurance broker Lindsay Armishaw of Futureproof Life. Photo / Thinkstock

Not buying it at all can leave your loved ones in the proverbial. Putting it off means that when you finally do want insurance, you may not be able to get it because of your unhealthy lifestyle or you may find you're saddled with numerous exclusions.

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Insurance broker Lindsay Armishaw of Futureproof Life says: "Procrastination can be an expensive choice when applied to the decision-making process around our health and lifestyle protection requirements. People seem to forget one of the basic facts of life: as we age our health deteriorates and our options for making good [insurance] decisions decrease accordingly.

"As with many other life necessities, it's better to have insurance and not need it, than to need it and not have it. This has been my experience over the years in business and life."
 

2. Buying too little

Losing the family home is the worst-case scenario that must be avoided. Photo / Thinkstock

It's common to take a stab in the dark when deciding what level of cover to buy. Or we base it on what we can afford to pay.

Financial services consultant Russell Hutchinson, of Chatswood Consulting, says: "Most New Zealanders have too little life insurance. Academic research shows this to be the case.

"A good test is will you keep the house [in the event of needing to make a claim]? Losing the family home is the worst-case scenario that must be avoided. You probably want more cover than that, but at least pass that baseline. Most insurance plans will fail this test either because there isn't enough insurance, or it doesn't cover not being able to work.

"Get out pen and paper and check your sum insured. The most commonly bought sum today is $200,000. If you died, and that was paid to your partner, once they took that off your mortgage, if they still can't keep the house, it isn't enough.

"You also need disability cover, preferably decent income protection insurance, because you are far more likely to be disabled than to die. Now do the same test: is it enough cover so that you can keep the house? If it only covers the mortgage payment, it probably isn't: you still need to pay power bills and eat, after all."
 

3. Not insuring your spouse

Think about all the scenarios that could affect you and your family and make sure you have a plan in place, says an expert. Photo / Thinkstock

Your ability to earn can be affected by the non-working spouse dying or falling seriously ill, especially if there are children. You might need to take time off work and there are costs such as childcare.