Life cover benefits can be at risk of terminal illness

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[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

by Steve Wright

Good advice and recommendations can avoid this risk, so what are the options available?

1. Increase the recommended life cover sum insured by the assessed likely financial implications of terminal illness; and or
2. 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
3. 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.

Tags: Opinion Steve Wright

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