Life cover benefits can be at risk of terminal illness
[Opinion] Life cover benefits designed to support surviving family members on the death of a client can be at risk if they are used ‘early’ to fund terminal illness, perhaps even to the point where the family is left with too little, resulting in a failure of the insurance to perform its purpose.
Thursday, March 5th 2026, 1:18PM 
7 Comments
by Steve Wright
Good advice and recommendations can avoid this risk, so what are the options available?
- Increase the recommended life cover sum insured by the assessed likely financial implications of terminal illness; and or
- Increase stand-alone trauma cover (most stand-alone trauma products now include terminal illness as a condition) to a sum insured as necessary; and/or
- Add separate insurance cover for terminal illness only.
Terminal Illness, which often generates its own expenses and loss, is a financial risk separate from death for people and should be treated as such (even if actuaries and underwriters don’t).
However:
- Increasing trauma cover sum insured to cover terminal illness is not ideal because prior trauma claims could reduce trauma cover to zero long before terminal illness.
While the proliferation of options to allow buy-back of trauma cover multiple times may reduce this risk, covering terminal illness risk with trauma cover or even severe trauma cover, is very cost inefficient because trauma covers costs much more than terminal illness cover.
- Adding life cover sum insured is also an expensive way of covering terminal illness because premiums include the cost of nice-to-have but unnecessary, death benefits.
Terminal illness cover may be the solution
In the last decade or so, some insurers have recognised that separately priced cover for terminal illness risk only, may allow advisers and their clients (particularly families) better, more efficient insurance choices.
There are many reasons advisers, and their clients may want to consider separately priced terminal illness products or options. For instance:
- • Separate terminal illness cover can protect life cover sums insured, substantially reducing the risk that high terminal illness costs dilute benefits designed to protect survivors on the client’s death.
- Aside from funeral costs, older clients, close to or in retirement, typically have low need for insurance on death. Many terminal illness costs, however, do not decrease with old age and risk may even increase.
Terminal illness cover is a much less expensive way of protecting the survivor’s retirement nest-egg against the deleterious costs of terminal illness prior to death.
- The ability to convert existing life cover to terminal illness cover, when appropriate and without medical assessment, greatly increases life cover value. It provides flexibility to continue with more affordable, ‘whole-of-life’ protection, regardless of the reduction in health that typically comes with ageing.
- Children under age 10 are still legally restricted to $2,000 death benefits but the same restriction does not apply to standalone terminal illness cover (which doesn’t pay benefits on death). The purely financial costs of the death of a child under age 10 are relatively low, but the financial costs of a child’s terminal illness are likely to be much higher.
Roughly 350 children in New Zealand die each year from serious illnesses. Many of these illnesses are likely to trigger a terminal illness cover benefit.
Suitable amounts of terminal illness cover on a child could give parents choices to explore treatments not covered by health insurance, cease work for a period and so on.
I suspect most parents in the terrible position of having a child with a terminal illness would prefer not to be forced to work during that very difficult time.
I am an advocate for covering children with trauma cover too and sufficient trauma cover sums insured (more than that sometimes offered at no cost) may be sufficient to also cover the terminal illness of a child. Where cost is a concern, terminal illness cover will be significantly less expensive. A combination of trauma cover and terminal illness cover may be a good solution for children.
Unfortunately, the ability to cover children under age 10 remains limited (several providers link existing terminal illness covers to life cover sums insured, so that doesn’t work while life cover benefits for under age 10 are is legally restricted) and one insurer has recently withdrawn its excellent standalone terminal illness product).
A valuable additional benefit (guaranteed Life Cover insurability) was lost with the withdrawal of the standalone Terminal Illness Cover product referred to above; namely the contractual ability to convert Terminal Illness Cover to Life Cover without medical assessment between the ages of 10 and 21, or later, on experiencing a ‘Special Event’.
Hopefully insurers that currently don’t offer standalone terminal illness cover will develop or reintroduce products to allow advisers to make more suitable recommendations and allow their clients better and more cost-efficient choices.
Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.
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On 9 March 2026 at 8:02 pm Steve Wright said:
Hi Paul
Good to hear from you and great comment.
I suspect it didn’t help Mr. Catherwood’s case that he was still alive several years after he claimed he was terminally ill back in 2019, or that he appears even at that time, not to have been terminally ill (it appears his Doctor’s view was that the aim of treatment was to cure and that Mr. Catherwood’s likelihood of dying low, was less than 10%).
Your point is well made though, naturally the life assured’s condition must satisfy the definition of ‘terminal illness’ for a claim to be successful.
It would be interesting to know how the Court would have ruled if the medical evidence was such that back in 2019, Mr. Catherwood was told there was nothing more that no further lifesaving/prolonging treatment was available for him in NZ, that he was likely to die (within 12 months) and that he should get his affairs in order. Would the ruling have been the same if hugely expensive experimental treatment not available in NZ (with unknown prospects of success) may have been possible?
In any case, not all treatments cure the illness or delay the inevitable beyond 12 months, some are palliative in nature or provide end-of-life care for both the life assured and the family. (Let me know if you want to hear my own experience with a terminally ill relative in that regard and we can have a chat).
It’s worth noting that many policies will now pay ‘Terminal Illness Advance Benefits’, which pay a portion of the sum insured simply on diagnosis of various specified conditions regardless of life expectancy, a benefit which exists also in at least one insurer’s Terminal Illness Cover Product.
On 10 March 2026 at 8:50 am Backstage said:
The argument assumes that the need for cash is different than if they died immediately.
Whilst it could be the case we are almost getting to a point like with fuel they put some magic ingredient in it and charge a premium and make the claim its very good for your car.
Will the next article explain how we are not doing the right thing if we are not selling specific injury or a little, death by accident cover, just in case?
Not everyone has the budget for the double patty cheese burger with gherkins, onions, olives, eggs x 2 etc, just in case you find yourself hungry later.
I would almost have to take a client offsite for a long weekend soon to just to do a fact find on this stuff.
On 10 March 2026 at 10:22 am Paul Flood said:
Hi Steve,
I’ll give you a call in the next few days. It’ll be great to hear your experience, and I can share mine (both personal and from my adviser days). It’ll also be interesting to hear your thoughts on the long-term care insurance products available in South Africa.
Without treatment Mr Catherwood’s prognosis was grim, in the same way (but to a different extent than) a Type 1 diabetic’s prognosis without insulin therapy is grim. It didn’t help Asteron’s case that Mr Catherwood is a lawyer, and the sum in question was around $1.2M. A plaintiff with the knowledge to pursue a contra proferentem strategy, and a lucrative outcome if successful. (Not suggesting that strategy had no merit.)
Does expensive treatment only available overseas at great cost potentially scuttle a TI claim such as your scenario? In the 2022 case, Dunnigham J at [70] does explicitly restrict consideration to “treatment within New Zealand” that was available to the plaintiff, so maybe not. (But that’s at best a guess about a specific hypothetical case and wording from someone without legal training, so make of it what you will.)
Your point about the defined condition criteria for partial payment on some TI offerings highlights an important general issue: greater clarity in policy wordings equals more certainty. Always a good thing going into a contract, and when relying on a response.
So much interesting reading just in the 2 Asteron cases, and the Galaxy Homes and Farkas cases cited therein. In the Farkas case for example, there is an extended treatment of the calculation of medical probabilities in law as they applied to the case at hand. There, the TI definition (unlike Asteron’s) included “highly unlikely”. This has broader application, such as to lump sum and monthly TPD benefits.
On standalone TI products: The Asteron, Galaxy Homes, and Farkas cases all have one thing in common – the courts were considering contracts where the TI benefit was an advance payment on a life cover benefit. Where the TI benefit is a standalone benefit, the same contractual interpretation might not apply, even if product and claims teams consider advanced and standalone TI benefits along the same lines as advanced and standalone trauma benefits.
On 10 March 2026 at 1:53 pm Steve Wright said:
Hi Paul
Looking forward to your call. As you say, lots if interesting issues.
Backstage: The need for more cash than if they died immediately (and how much) is the risk they need their adviser’s advice on. This is easily demonstrated for most family situations, even if it’s just enough to give them the choice not to work during their loved one's final months.
It’s up to advisers to illustrate this suitably (risk and possible quantum) to their clients and offer a solution.
If the client then chooses not to take it for budget or any other reason then that’s on the client.
If advisers choose not to raise the issue with their client when the risk might be there, is that still on the client?
On 10 March 2026 at 2:43 pm Backstage said:
Hi Steve, I do appreciate the points your are making.
The problem is reality and budget is always the issue despite this assumed obligation to point out every single element of risk and measure the impact.
This thought that we are obliged to take all the time it takes to present an out of reach solution when we have their details on income, assets etc and know full well their major concern is, what is this going to cost me?
We could stack another argument that suggests, we should know our clients.
This also means, know their budget and appetite for risk eliminating time wasting and watching their eyes glaze over as we describe every single danger that could befall them and then finally land this enormous premium that has them say, thank you, leave this with us and we will get back to you!
Just because a feature exists on a brochure and a supplier decided to tweak their ratings on a rating house by adding or augmenting products with extreme features does not oblige us to point them out.
Unfortunately, given the market over the past few years I have watched clients struggle financially.. I find mostly, the core product is what is most important and determining exactly what problem we are trying to solve. Nice to haves are nice to have but for the majority of clients, budget is very dominant.
On 13 March 2026 at 12:07 pm JPHale said:
Good discussion chaps. Like Backstage said, budget is often the challenge.
In more recent times we have had a plethora of new benefits that attempt to differentiate from the traditional 6 products but feel like they're more layers to extract dollars out of consumer pockets.
Valid, there are some that are genuinely fillings gaps, though the best of these Partners Life withdrew from the market and the rest of the insurers didn't understand it; Specific Conditons Cover. And I’d argue many in Partners Life didn't understand it either which is why it was pulled.
There are a couple of distinct approaches to advice I’m seeing;
1. Do the full plan and then build the solution with client input, this often results in a range of traditional products that cover the clients needs without the extra wallpaper over the cracks.
2. Sell something to budget, maybe replace what's there, and attempt to expand the spend by papering over the cracks.
It's not that either is right or wrong, horses for courses and how things are scoped and worked through.
There are plenty of situations where age, occupation, or medical conditions means you have to get creative with your approach, and this is where convos about terminal illness cover for income support come in.
You can’t get TPD for non-earners that works, nor may you be able to get trauma cover. But financial help when facing a 2 year terminal illness is needed and cover with term illness cover for this period makes some sense.
The reality for good risk advisers is they may not use all of the products all of the time, but they need them on the shelf so they can manage the options and solutions for clients when things are not ideal.
That would be considered good risk management rather than just sales.
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On my reading, the decisions in Catherwood v Asteron Life [2022] and Catherwood v Asteron Life [2023] seriously call into question whether Terminal Illness Cover can be recommended on the grounds it can be used to fund treatments, or at least, treatments that have any theoretical prospect of extending life expectancy beyond the qualifying period for a claim (be it 12 or 24 months).
As plaintiff in both cases, Catherwood contested Asteron's decision to decline his terminal illness claim. The cases centered on the correct interpretation of "regardless of” as it appears in the phrase “regardless of any available treatment”.
Catherwood argued that “regardless of” should be interpreted to mean “ignoring the effect of any available treatment”, and in response Asteron maintained that the only objectively construable interpretation is “despite the effect of any available medical treatment”. The original judgement in favour of Asteron was upheld on appeal.
Crucially (for my point), both decisions cite Galaxy Homes Pty Ltd v The National Mutual Life Association of Australasia Ltd [2013], which briefly addresses the scope of “any available treatment” as it appears in the above phrase. At [50] of that decision it is noted:
“It shows in our view that even a theoretical recovery from the most expensive and rare treatment is to be taken into account.”
This is a very broad interpretation, and establishes (I think) that client understanding of TI Cover should be along the lines of “cover that will only pay out if death within [insert qualifying period] is a medical certainty".