RICHARD MEADOWS
In eighteenth century England, bored merchants sat around in coffee shops gambling on the lives of strangers.
The crew of trading vessels were the first targets, but it soon became a great lark to place bets on when famous figures of the day would pop their clogs.
It's the grisly equivalent of us betting that John Key won't make it to retirement age, or speculating on how long Nelson Mandela can keep clinging to this mortal coil.
Naturally, the church didn't approve of making light of God's will, and the law was changed in 1774.
But you could say the splendidly tasteless sport lives on through the financial product we call "life insurance".
Of course, these days it's not much fun. You're only allowed to bet on your own prospects of kicking the bucket, and confronting your own mortality isn't exactly a barrel of laughs.
It is, however, a necessary evil. Here's why:
Who's it for?
Nostradamus might have predicted his own death, but most of us walk through life blissfully unaware of the bus that's going to run us over just around the corner.
Let's say you're earning good money as head zookeeper, until you're tragically crushed to death by a rogue elephant.
When your lovely spouse and darling children recover from the shock, they're confronted with another cold reality - where does the money to live come from now?
In the worst-case scenario, they'll be turfed onto the streets, begging bowl in hand.
Let's get one thing straight - if you're not supporting anybody, life insurance is a complete waste of money.
If you die early, you hit the jackpot - but you can't take it with you.
If you don't die early, you've wasted a huge amount of money on insurance premiums.
So rule number one is, you only buy life insurance to benefit other people.
What's your number?
Most providers will let you choose the sum that you want your family to receive.
Pinnacle Life partner Ed Saul says the exact number will vary hugely depending on your circumstances.
"You've got to work out what your immediate debts are that you want to kill, and beyond that, how much money do you need for dependents to continue to live," he says.
Usually that's a bare minimum of knocking off the mortgage and providing a lump sum to keep the family going.
If you're the sole breadwinner with a brood of five young kids, your number could be pretty substantial.
"If you're 50 and the kids are almost ready to leave home, you're going to need a lot less," says Saul.
You also have to factor in funeral expenses, whether your partner could return to work, and the number of years before your kids will be standing on their own feet.
Consumer New Zealand provides an excellent calculator for working out this figure. Let's look at a few scenarios.
1.$100,000 mortgage, one young child, partner can return to work.
Family needs extra income of $20,000 a year for 15 years.
Coverage required: $340,000.
2.$300,000 mortgage, $10,000 credit card debt, five children, partner can return to work.
Family needs extra income of $40,000 a year for 15 years.
Coverage required: $570,000
.
3.$500,000 mortgage, no children, partner incapable of working again.
Family needs an income of $30,000 for 30 years.
Coverage required: ??$1,050,000.
As you can see, the sum varies hugely. Ideally you want to to cover as little as possible, with a healthy safety buffer.
Run your own numbers using the calculator here.
Which type to buy?
Most life insurance in New Zealand is sold on an annual renewable basis, just like your car insurance.
That means you get sent a reminder each year, and the premium goes up a bit because you're one step closer to death.
Saul recommends this option, simply because you have the flexibility to adjust it each year and ratchet it up or down according to life's ebbs and flows.
"After five years you may decide, I don't need $1m anymore, I need half a million," he says.
The other option is a "level" term, where you're locked in for several years of premiums at a consistent price.
Consumer New Zealand researcher Scott Donaldson says it doesn't usually matter which you choose, because the cost over the life of the policy will end up much the same.
Locking in to a level term is pricier to start with, but there's security in knowing the premiums won't become more expensive over time.
"However, make sure you want the cover for the length of the policy, because that's what you'll be committed to paying for," says Donaldson.
How much does it cost?
When you sign up for insurance, the first thing a company does is perform a series of grisly calculations to estimate how far from the grave you are.
Age is the most obvious factor. Consumer NZ's research found a couple in their 40s will pay more than twice as much as a couple in their 20s for the same policy.
If you're young, expect to pay premiums of anywhere from $20 to $60 a month, depending on how big a lump sum you want.
If you're middle-aged, it's more like $50-$150.
Then there are lifestyle factors like your health, occupation, hobbies and whether or not you smoke.
An obese diabetic with a history of mental health problems is going to have astronomical premiums - if they're insurable at all.
Fitness freaks will find it much cheaper.
Consumer NZ's survey covered 21 insurance providers, and found an enormous difference between the products on offer.
The most expensive provider for the young couple was AMP's LifeTrack cover, which charged more than twice as much as The Warehouse.
The gap narrowed for the middle-aged scenario, but there was still a disparity of 50 per cent.
As always, it's crucial to shop around.
"Get quotes from at least three companies," says Donaldson.
"If you want advice about how much cover to get or are unsure about comparing policies, you're best to use a broker or adviser."
***
Hopefully this gives those of us who think we're bulletproof a bit of a wake-up call about looking after our families.
But it's not the end of the story. Unless you tread very carefully, all your preparations could be for nothing.
Your relatives will be left in wrack and ruin, able to afford only the tackiest plastic flowers to adorn your faux-marble headstone.
Stop by next week for the second part of the series, which will cover how to avoid life insurance traps and pitfalls.
Source: Fairfax NZ News
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