Part Four: Taking Out A Policy

Welcome to Crayon’s mini-series on personal insurance. Throughout this series, we’ll explore how it could work for your family and give tips from our experts to make it easy, actionable and effective.


In this third part of our insurance series, we cover generally accepted good practices and lesser-known tips that can make a difference when initiating a policy. 

You’ll notice that we haven’t given guidance on how to pick the best policy, and that’s because personal insurance is very technical, meaning personal circumstances matter a lot. A good advisor can help you determine what adequate coverage looks like for you and your family.

Decide on policy ownership

The policy owner is to whom the insured amount is paid. You typically have three options:

You are the sole owner of your policy 

  • Advantage: You have complete control over your policy, and you can make changes whenever you wish.

  • Drawback: When you pass away, the life insurance payout goes into your estate, and the funds are distributed according to the law and your will if you have one. Most estates take approximately seven months to a year to settle, and the funds could be subject to any delays in (or costs of) obtaining letters of administration or probate. 

You are the sole owner of a policy on someone else’s life:

Let’s use the example of a wife who takes out a life insurance policy on her husband. 

  • Advantage: When the husband passes away, the funds are paid directly to the wife without going through the husband’s estate administration process, so the funds are received sooner.

  • Drawback: If the wife passes away before the husband, the new policy owner is determined by the wife’s estate. It does not automatically pass to the husband, even though it’s his life that is insured.

You jointly own the policy with someone else (e.g., your partner):

Joint owners have joint control of the policy. This means any changes to the policy require signed authorisation from all joint owners. There is no limit to the number of joint owners.

  • Advantage: When you pass away, the funds are paid directly to the remaining policy owner(s). Since this bypasses your estate administration process, they receive the funds much faster. 

  • Drawback: You are unable to leave part of your insurance payout to anyone who is not a joint owner, such as children or grandchildren. Also, things can get tricky if a couple splits. Since all changes require joint agreement, one person could refuse to let the other change or cancel the policy (unless your insurer has specific clauses stating otherwise). This means your ex-partner could remain your beneficiary long after you’ve split.  

In some situations, a company or a trust can own a policy. We suggest talking to an advisor if you want to explore this option.  

Consider premium structure

There are two types of premium structures: stepped and level. 

  • Stepped premiums “step up” or increase as you age. In other words, your insurance gets more expensive every year.

  • Level premiums are largely fixed for the duration of the policy. They can still increase slightly due to inflation and policy fees but are much more stable than stepped premiums. 

Most policies sold in New Zealand have stepped premiums. Initially, stepped premiums are cheaper, while level premiums are more expensive. Over time, however, stepped premiums become more expensive. Level premiums can be considerably more affordable in the long run. 

The breakeven point (where the total amount you’ve paid in level premiums becomes less than the total amount you’ve paid in stepped premiums) varies depending on how old you are when you initiate the policies. The older you are, the less time it will take you to break even.

It could be the case that you have a bit of both: level premium cover for a “core” amount of insurance you intend to maintain for the long term and stepped premium for cover you intend to reduce or cancel in the short to medium term. 

Here are some sobering stats: the average age for taking out a trauma policy in New Zealand is 41 years old. The average age for cancelling a trauma policy is 48 years old. And the average age for making a claim? 51! The stats are similar for life and income protection. 

In other words, many people pay premiums for a number of years but cancel their policy before they’re likely to claim on it. Sometimes this is because it gets too expensive - between the age of 41 and 48, stepped premiums can almost double in cost. 

The only way for you or an advisor to know how best to structure your premiums is to calculate your insurance needs today and in the future. Factors to consider include career and earnings progression, debt paydown rates, and any anticipated windfalls. 

Know the levers you can pull to reduce the cost of income insurance 

With income insurance, you not only need to decide how much coverage to get but also how long you’re willing to wait before you start receiving payments should you make a claim (reminder: this can range from two weeks to two years) and how long you’ll receive payments for (reminder: typically two years, five years or until age 65). 

Percentage cover: typically, income insurance coverage defaults to 80% of your earnings. If you could live comfortably enough below that level, one way to reduce your premium is to dial down the percentage cover.

Waiting period: the waiting period you select should reflect how long you can maintain your desired lifestyle if you have no income. From the perspective of lowering your premiums while not wanting to wait for months on end, the sweet spot is around 13 weeks. The premiums on a policy with a 13-week waiting period are around 40% lower than premiums with a two-week waiting period. Consider whether you have another source of money that could tide you over the waiting period, such as an emergency fund or offset account.

Payment period: it does sound nice to have protection until the retirement age of 65. But when it comes to affordability, keep these indicative stats in mind: 65%+ of people who claim income insurance are back at work within the first 12 months, which rises to 80%+ by the two-year mark. Around 5% of income protection claims last longer than five years, and fewer than 1% make it to age 65.  How long you elect to receive payments comes down to how much risk you want to transfer to the insurer and how much you’re willing to live with. 

Understand the optional extras with trauma insurance

There are two boxes you can tick on the form that can make a material difference in the future. 

  • Early payment means the insurer will pay you some or all of the coverage if you get the diagnosis before an illness has become full-blown. This makes sense for a disease that can progress over years, such as cancer, Alzheimer's and Parkinson’s.

  • Reinstatement enables you to reinstate your trauma cover after a claim. You can't claim on the same condition twice, but you can claim for other illnesses. For example, if you claim the first time because you have cancer and make it through that, but then you have a heart attack, if you’ve reinstated your trauma cover, you can claim again. If you don’t select this option, your trauma cover will lapse after one claim. You can apply for a new trauma policy, but the pricing may be higher and/or the list of exclusions longer to reflect that you’re at a later life stage because, typically, our health gets worse, not better, as we age. Policies differ on how many times you can reinstate trauma insurance - generally, it’s just once, but some offer more.

Get at least two quotes

Not only can premiums differ from insurer to insurer, but having more than one quote will enable you to compare how the key benefits differ. The details really do matter when it comes to personal insurance. If you’re working with an advisor, ask them to explain how the quotes differ in the policy wording, so you understand if you’re comparing apples with apples or apples with bananas.

Be honest in your application

Historical payout rates by the large personal insurance providers in New Zealand are upwards of 90%. But one of the main reasons claims aren’t paid is non-disclosure. This one sounds obvious, but if during the application process you do not answer the questions truthfully - for example, you fail to disclose a history of illness - your insurance claim can later be denied.

In the last part of our series, we go through how to manage your policies once you’ve got them in place.



Now for the important legal part: The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 15 November 2022.


Royden Shotter

Financial Planner and Founder, Planolitix

Stephanie Pow

Founder and CEO, Crayon

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Part Three: Personal Insurance 101

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Part Five: Squeezing the Most Out of Your Policies