The new(ish) cover type no one is talking about

Almost a decade ago, which is pretty recent tbh — Partners Life introduced a novel insurance product for New Zealanders. They called it Terminal Illness Cover.

Up until 2016, Kiwis could only purchase Life Insurance (which covered both death and terminal illness) but standalone Terminal Illness Cover focuses on covering Terminal Illness only, and at approximately half the cost of Life Insurance.

From my experience in the industry (since and prior to the launch of this unique product) — it seems to me that this cover type has been underrated and underutilized by New Zealand Insurance Advisers.

At Harness Financial we are using Terminal Illness Cover more and more. It has a very specific use case and if harnessed correctly it can ensure both improved spread of cover as well as a reduced overall spend for our clients.

Partners Life Terminal Illness Cover - What is it?

In the event of a policy holder being diagnosed with an illness where they are likely to die within the next 12 months, the full sum assured will pay out.

Additionally, if the policy holder suffers an accident and as an immediate and direct result is diagnosed as unlikely to survive longer than 3 months the policy will also pay out the full sum assured.

For both claimable events, the policy holder must survive for 30 days after the diagnosis or accident respectively.

How is this different from Life Insurance?

Life Insurance covers the above, but will also pay out in event of unforeseen death.

So, why not just have Life Insurance if it covers both Death and Terminal Illness?

I’m glad you asked.

I’ve administered a number of Life Insurance claims throughout my career.

Pertinently, the majority of all these claims have been for a terminal illness rather than a sudden death. In many cases, these terminal illnesses have lasted years. One lasted almost 5 years (a case of a legend battling terminal cancer and repeatedly defying all odds).

The thing is, Personal Insurance (such as Life, Terminal Illness, Trauma, Income Protection etc) is normally implemented as a strategy to protect household income from either:

1. The unwell person being unable to earn as usual
2. A ‘well’ personal being unable to earn as usual because they are taking time off work to care for an unwell loved one
3. ‘a’ and ‘b’ combined.

Consider this: The worst case scenario (financially) for a family is one where both a well and unwell person’s earning potential in a household is disrupted for a significant period of time.

The problems with an over-focus on Life Insurance

I have seen it time and time again, Life Insurance cover has been implemented for the purpose of paying off a mortgage or replacing the Life Assured’s income should they die —

—But they don’t die quickly, instead it takes years -- the Life Insurance cover is paid in advance using the Terminal Illness benefit and the funds don’t go towards paying off the mortgage, instead they go towards replacing the lost income of the unwell person as well as the well person who has taken time off work to care for their loved one!

Eventually the terminally ill person dies, and the survivors find that the Life Insurance cover has all been used up keeping the family running during these awful years.

Certainly, it is a mistake to only take out Life Insurance when more claimed-on products like Trauma Insurance (aka Critical Illness Insurance) Income Protection Cover or Health Insurance are readily available.

But, in fairness, sometimes Life Insurance is all that can be afforded, and that’s okay. It's therefore crucial to ensure the cover you have lines up with the cover you need and you are spending strategically.

Age and stage matters - Your cover shouldn’t stay the same throughout your life

As Insurance Advisers who regularly review cover portfolios of folks who come to us with an existing insurance portfolio, we are always identifying better ways of structuring cover to improve both cover spread and affordability. Sometimes this is because the original structuring was poor to start with, but other times its just because the clients needs have changed throughout the years.

Scenario 1: Is your Life Insurance high enough to also cover a Terminal Illness Scenario?

Lets say you are the sole earner in your household and have $1.2m of Life Insurance. Your mortgage is at $750k, you earn $145k per annum net and your partner looks after your three children full time and would not easily be able to earn close to your net income without years of study and experience.

You get diagnosed with stage 4 prostate cancer and are diagnosed terminally ill. You choose to take the recommended (aggressive) treatment modalities and manage to survive three tough years. Your partner works part time earning $45k p/a net but needs to cease work to properly care for you and the children.

Three years of net household income is $570k and you have used your Life Insurance to replace this income bringing the remaining Life Insurance sum down to $630k.

The mortgage is able to be cut down from $750k to $120k with the Life Insurance pay out which is great, but a significant problem remains -- two of the kids are under 5 years old and going to work full time won’t make up for the shortfall in net income the family is about to experience.

The Life Insurance was great, but it wasn’t enough because a Terminal Illness ate more than half of it away.

This scenario happens all the time. Don’t let it happen to you!

Consider this, a 40 year old male can buy an additional $570k of Terminal Illness Cover over and above his Life Cover for just $5.50 a fortnight.

Is this something you should be doing?

Scenario 2: You’re nearing retirement, and your Life Insurance is getting expensive

You’re 63 and your husband is 62, you’ve put in the mahi, the mortgage is gone and you and your husband are saving like mad for retirement. You earn a household net income of $190k and know that you still need both your incomes to at least age 70 in order to properly save enough for retirement.

You’re looking at your Life Insurance cover of $630k each and it has become fiendishly expensive at $1,005.58 per month! You feel you still need this cover to replace income long term if one of you dies, but you wonder how you can cut this down.

You talk to your Insurance Adviser....

....and they recommend a new strategy -- cutting your Life Insurance down to 6 months net income and taking out the remaining cover as Terminal Illness cover. Saving you $331.85 per month.

Your current cover:

Your new cover:

What now then?

Look, it’s really time you sought a review of your insurances isn’t it?

Give us a call on +64 4 384 7113, send us a message at https://www.harnessfinancial.co.nz/ or you can book a meeting directly into the calendars of our Senior Insurance Advisers here:

Samuel Rees-Thomas | Jonathon Gilling | Joshua Logan |

Thanks for reading my article!

Sincerely,

Samuel Rees-Thomas

References:

https://www.goodreturns.co.nz/article/976504175/terminal-illness-cover-launched.html