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
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
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
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.

Chris Lamers, head of marketing and innovation at Sovereign, says: "As you develop your 'what if' plan, it's important to consider a few scenarios. Often people look at what they would do if the main income earner couldn't work for a period of time, or passed on. But often there is a significant impact if someone else in the household is seriously ill, or in the worst case, passes on. The main income earner may be required or wish to take time off to care for the person or for the rest of the family.

"As an example, someone told me recently of a full-time mother who got breast cancer. Obviously, this is a traumatic time for any family, but it became even more difficult because the main income earner couldn't afford to take time off work to care for his wife and children. Even a trip to hospital with his wife became a problem. One solution would have been for the wife to have had a life or trauma insurance policy.

"The lesson here is to think about all the scenarios that could affect you and your family and make sure you have a plan in place."

4. Failing to consider 'extras'

Check what add-on benefits are available with a policy and consider whether you need them. Photo / Thinkstock
Check what add-on benefits are available with a policy and consider whether you need them. Photo / Thinkstock

You're much more likely to suffer illness than die. Some insurance policies cover you for far more than death. They may have extras or related insurances that cover you for income protection, trauma insurance and disablement.

Nadine Tereora, managing director of Asteron Life, says: "When it comes to all the different types of life insurances there are, a payment on your death to provide for your family is the most well known. But insurance planning should also make sure that if something unexpected happens, like getting sick or injured, you have cover in place to help financially maintain your lifestyle."

It's a good idea to check what add-on benefits are available with a policy and consider whether you need them.

5. Not reviewing your policy

Picked up a new hobby? It's time to review your policy. Photo / Thinkstock
Picked up a new hobby? It's time to review your policy. Photo / Thinkstock

Your circumstances can change and insurance policies evolve.

Lance Walker, chief executive of Cigna NZ, says: "Your life is dynamic — it's changing. Simply setting and forgetting about the sum you are insured for could see you with too little or too much insurance. Reviewing your policy at key life stages — getting married, taking on debt, having children, leaving the work force — ensures that you have the right amount of insurance for your stage in life.

"For example, you might need a high sum insured if you have small children and a large mortgage, but a much lower sum insured once the mortgage is paid off and you have more savings.

"A good life insurance policy will have some flexibility to change as your needs do, either by reducing or increasing your amount of cover without any further health or lifestyle questions if you have a life change such as a marriage, birth, adoption or getting a mortgage.

"If your personal circumstances change — such as you take up a risky hobby such as sky-diving — it pays to check your policy wording to ensure it still meets your needs."

6. Buying on price

Other than price, there are a host of factors to consider, such as policy quality and customer service. Photo / Thinkstock
Other than price, there are a host of factors to consider, such as policy quality and customer service. Photo / Thinkstock

Comparing life insurance quotes is notoriously difficult. It's very easy to be comparing oranges with apples and not realise it. One policy might pay out on terminal illness and another on death only.

Conor Sligo, general manager of Life Direct, says: "Price is important when choosing an insurer and you can almost always save money by shopping around.

"But there are other things to consider, too. We reckon a person choosing an insurer should also look at financial strength, policy quality and customer service, including the insurer's reputation at claim time. The good news is that these are easier to compare than they used to be.

"For example insurers have to disclose their financial strength rating, and there are good independent sources of policy-quality ratings such as Quality Product Research (QPR) available in the market. These will help you avoid nasty fish-hooks — like a life insurance policy that has exclusions other policies don't have."

Another factor to consider is who a claim will be paid out to. Will the pay-out go to your spouse or a trust, in order to pay off a mortgage? Wills and trusts are also worth thinking about at the same time as you're shopping for life insurance.