Insurance
9 min read
Author: Bill McGavock
Insurance adviser
Reviewed by: Darryl Scott
Darryl Scott, Insurance Adviser
Everything changes when you first become a parent.
You’re no longer just thinking about yourself (and your partner). You also have to think about a little living, breathing human who relies on you.
So, you stop just thinking about the present and you begin to think about the next two decades, including all the risks, like:
So when you become a parent, your need for insurance changes.
Think about it this way. If you don’t have kids and you die early, it might not impact many people financially. But it’s a different story if you’ve got kids because they rely on your income for at least 18 years.
So, what insurance do you need if you’re a parent? And how does that change if you’re a solo parent vs if you live in a two-parent household?
In this article, you’ll learn about the types of insurance parents need. This includes which ones are better suited for different kinds of people.
There are two types of insurance parents should think about.Â
For example, you might take out life insurance for yourself, so if you pass your children are looked after, but then you might also get health insurance for your child. This will pay for any surgery or treatment they need.
Let’s start with insurance you might get for yourself.
Here are the main policies I help parents get for themselves.
Life cover means that if you die your surviving partner (or kids) are paid a lump sum.
One big question people ask is: “How much life cover should I take out?” Should it be $250k, $500k, $1 million, or more?
Typically, most people take out enough insurance to cover:
In addition to this, as a parent, you might also want to leave extra money for your children. This is known as a legacy.
That’s why I’ll often talk to parents about whether they’d like to add a $30- $50k lump sum for their kids.
That means if a parent passes, the child has money to help pay for university, a gap year, or a first home deposit.
Life income cover is slightly different from normal life cover and works well for solo parents.
For example, if you’re a solo parent and you die early, someone will need to take care of your child(ren).
But you need to ask yourself: “Can this person financially support my child?” If that’s an unfair ask, you might consider life-income cover.
This pays money to the child’s caregiver. For example $1000 a month, per child. This is usually paid out in five-year chunks.
I often advise my clients to take out this cover until their youngest child is independent.
But if you’re part of a two-parent household, you might not need this type of insurance.
However, there are exceptions to this “rule”. If the surviving parent needs extra financial help, you might still consider this. This is something to discuss with your broker, because the more life insurance you have, the less life income cover you need (and vice versa).
Trauma insurance pays out a lump sum (e.g. $100,000) if you or your child becomes seriously ill or injured. For example, if you have a heart attack or get cancer.
Trauma cover comes in because if you get seriously sick, you may not be able to work. This makes it hard to support a family.
So, parents will often take out trauma insurance. That way, if they get sick the family’s financial needs are still taken care of.
Total and Permanent Disability (TPD) cover is something I’d discuss more with a single parent.
This policy pays out a lump sum if you become disabled and not able to work again.
The reason why this is particularly important for single parents, is because you may not be able to move you and your child(ren) in with another family member.Â
If you’re left permanently disabled, you’ll need more money to care for yourself and your child over the long term.
Of course, if you're in a two-parent household, then the other parent is there to help.
Income protection insurance replaces part of your income if you can’t work due to illness or injury.
Depending on the policy you take out, the insurance company might pay you income for as little as 2 years, or up to the year you turn 70.
Of course, the cost of insurance (your premium) will be higher the longer you want the insurance company to pay you.
A single person might think, “Five years of income cover is enough for me to get back on my feet if I’m sick or injured.”
But as a parent, you might want to extend that coverage to age 65 to protect what would have been your working life.
You don’t need to take out the maximum insurance for all of these policies.
It’s not about getting a massive:
This is because some of these policies cover similar risks. Instead, you’ll work with an insurance adviser to select a bundle of policies that work for you.
I’m not saying you need all 5 policies, but it’s important to know your options so you can have an informed discussion with your adviser.
As well as insuring yourself you might also consider insuring your child. That way if something happens to them, you receive financial help.
Trauma cover is usually something parents consider for themselves. Again, this pays you money if you have a heart attack or get cancer.
But it’s also available for children.
Five major insurers in New Zealand offer trauma cover up to $50k for children. This is at no extra cost as long as a parent has Trauma Cover for themselves.
Parents often don’t get trauma cover to pay for their child’s medical treatment. Instead, it’s there so parents can be by their sick child’s bedside. That way, you can take time off work without worrying (as much) about money.
This is a really hard topic to discuss; no one wants to think about their child getting sick.
But one major NZ insurer has paid out $8.8 million in child trauma cover over the past 12 years. So, this does happen.
This is another one that is hard to discuss. As a financial adviser (and a parent), it’s not a conversation I enjoy.
But it’s important to consider what happens if your child is diagnosed with a terminal illness.
Because if that unfortunately happens, there is only one important thing – spending time with your child.
So this policy pays you a large lump sum so you don’t have to go to work. That way you can make the most of the time you have left.
I usually quote $200k for this payout. It will never take away the pain of losing a child, but it can make the battle a little easier.
Some people consider private medical cover unnecessary. After all, medical care is often “free” in NZ.
But if you do want to take out health insurance, I recommend adding your children to the policy too.
It’s much cheaper for a child because the statistical probability of them needing to claim is low. And insurers know the public health system will do more for a child than an adult.
So I talk to parents about getting a low or no excess policy. This means your child will be covered for almost any condition.
Compare that to taking it out when you’re 40. You may have pre-existing conditions (illnesses or niggles) that are excluded from the policy.
I’ve had 30 and 40-year-old clients who’ve had medical insurance since they were born, and that is like gold. They’re covered for everything.
If you do decide to insure your children, you might be wondering about the extra cover.
It can cost as little as $2.80 a week to provide your 3 kids with $50k each.
Let’s say Beth and John are both 40. They have 3 kids, aged 8, 6 and 4. They want each child to have $50k if Beth or John were to die early. This money would be used to cover the children’s university costs.
For both of them to cover their kids for a collective $150k, it’s a premium of:
Steve is 35 and a solo dad. He’s agreed that if he passes early, his sister will look after his 2 young kids. But, if that happens, he wants to make sure the finances are sorted, so he takes out life income cover.
If he dies, his sister would get $2,000 a month from the insurance company. That’s $1,000 per child and that payment would continue for the next 20 years.
The premium (cost of the insurance) is $24.12 per month. That’s just under $6 a week.
Debbie and Tim are talking with their insurance adviser.
They’ve decided to take out a policy so that if their 2-year-old daughter is diagnosed with a terminal illness, they are paid out $200,000. This is so they can spend as much time with her as possible. Again, this is a tough topic to discuss.
The monthly premium is $2.12 a month (less than 50 cents a week). But only one insurance company in NZ offers this.
Insurance premiums for children are generally much lower than for adults.
As you’ve seen in the cost section, you can insure your child for quite large sums for minimal amounts.
That said, it’s not an easy conversation to have with your broker.
No parent wants to put a price on their child getting sick or dying, or thinking about leaving their kids behind. But if the worst were to happen, you know your child will be financially supported by you.
And if your child falls ill, you won’t have to worry about keeping your job while they’re in hospital. You can be by their side without the added stress of financial hardship.
If you’d like to have a conversation about insurance, you can contact me directly. I am an insurance adviser here at Opes Insurance.
Insurance adviser
Bill McGavock is an Insurance Adviser at Opes Insurance. He has over 25 years of insurance and customer service experience. Bill provides personal risk advice and claims assistance for individuals, families, and businesses. He specialises in helping property investors protect their ability to grow wealth. Bill is based in Auckland.
