Life Insurance in a Low Interest/Inflation Environment.

Families purchase life insurance for many different reasons. Whatever way a family uses life insurance it comes down to one thing, that is income. It is highly logical to use life insurance to repay debt. The repayment of debt releases the survivors from having to fund debt repayments, this releases the survivors from an ongoing financial burden.. Inflation has no effect upon this philosophy, deleting debt upon the death of a "bread winner" is good and sound logic.

Another primary purpose of life insurance for a family is to create an income for the survivors. Most families want to guarantee the continuation of an income in the event that a parent dies. The problem is that in today's economic environment the creation of an ongoing income for family support after the death of a parent is very difficult. Bank interest rates have halved, which is great if you're borrowing money, however not so great if you're investing money. If a family wanted to create an ongoing $30,000 income upon the death of a parent the family would need twice as much life insurance today compared to 8 years ago. The table below illustrates this principle.

Whilst the mathematics are simplistic the principle is blatantly clear, families need significantly more life insurance today than they did in 1991, simply because interest rates have halved. Logically families should purchase more life cover on the breadwinners. The theory is good but the economics of doubling a families life cover is where the argument falls to pieces.

Three New Zealand life insurance companies recognise this problem and have designed products that specifically address this issue. If a family wants a $30,000 income upon the death of a parent then the insurance company will pay the family $30,000 per annum. This saves the family from purchasing $600,000 life cover to achieve the same outcome. A remarkably simple idea. Lets look at the savings in premium.

* $2,500 payable monthly until the Life Assured would have been aged 65.

Whilst $14 per month my not seem a lot, the difference is 50%. The $600,000 lump sum upon death is 50% more expensive than the ongoing $30,000 per annum. Also the $30,000 per annum income is free from tax.

Another problem associated with a lump sum payable upon death is that the surviving partner often feels confused and tormented about investing the proceeds of the life policy. Deciding how to prudently invest vast quantities of money is a difficult task, even for experts.

Therefor we recommend that if a person has purchased life insurance on the understanding that it will provide income assistance to the surviving family, then a review of current levels of life cover is probably a good idea. Low inflation and interest rates have many advantages to the average NZ family, conversely there are also disadvantages as I have illustrated.

If you wish to review your level of life cover in the current economic environment we would be happy to assist you evaluate your current position.

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