Author Katrina Shanks, CEO Financial Advice NZ Article originally published in Stuff.co.nz.
Insurance is the most boring of payments, one where you are unlikely to see an immediate benefit, if you see one at all. And for all that, it can be so complicated, especially when it’s for income protection, trauma, or disability. That’s probably why most of us have a lock and leave mentality about our insurances.
When was the last time you reviewed yours? A year ago? Two? Five? Or was it a decade ago when you got your original mortgage because the bank insisted you have life insurance before approving the loan?
As we change in age, and in the stages of our lives, so does our need to review our insurance.
Let’s look at some examples of the insurance you probably have.
Most people select life insurance to either provide for their family or to simply cover debts such as the mortgage should something happen, and they become terminally ill or die. This provides peace of mind that those they leave behind will have some financial security.
But at different ages and stages, this can change.
For example, you may have needed a life policy to get that mortgage when you were younger or getting your first home. Later, you may need to consider a life policy if you are the main bread winner and would like to provide for your family if something happens to you. As you age, you may decide you’re financially secure, have no debt and don’t need this protection, or at least not quite as much.
The most common type of life insurance is ‘Term Life’, which continues for as long as you want it. Cover can be either level or linked to the Consumer Price Index. Premiums can increase each year (Annually Renewable), be fixed for a term (e.g five or 10 years), or level to age 65 or 80. Many policies will pay out the entire sum insured, or a portion of it, on diagnosis of a terminal illness. This gives you money to live on, or pay for care if you are incapacitated and can’t work.
The cost of some life insurance products can depend on a range of factors. These include your gender, age, health, occupation, hobbies (risky ones, at least), family history, and whether you smoke or not.
Add to that, things like the amount of cover you want (the sum assured), how long you want the cover for, when it starts (immediately or in two years, for example), and the extent of cover and exclusions.
Though it looks complicated, working out the cost is automated and can be quite a simple process.
Just because you have obtained a price point that works for you, does not mean you have selected a solution which meets your needs. But note that any of those health or family history issues might require further research by the insurance company (at their expense) before a final cost can be provided.
The other type of insurance popular in New Zealand is health insurance.
This allows you protections if something goes wrong, and can give you access to quicker and often more comfortable hospitalisation, as well as day-to-day medical expenses, depending on the cover you want.
In New Zealand, we’re lucky to have an excellent public health system and a robust ACC system (which is not always perfect), which means health insurance is far from a must, unlike in many countries.
But it does provide a choice and an alternative to self-funding access to medical expenses and hospitalisation if that’s what you feel more comfortable with.
There are three main types of private health insurance: ‘Comprehensive’, ‘Major Medical’ and ‘Minor Medical’, and they all come with different benefits, exclusions, and costs.
‘Major’ policies are the most popular, comprising 69 per cent of all health policies. They normally cover only those conditions that require surgical treatment and related expenses, and exclude day-to-day costs such as doctor’s visits and prescription charges. ‘Minor’ policies are the least popular at 3 per cent of all policies.
Insurers normally have plans with add-ons such as diagnostic, optical or dental cover. You can also have plans with a range of excess options, with higher excesses linked to lower premiums.
You can make big premium savings by taking out a policy with an excess, compared to one with no excess, so like all insurance, it pays to shop around. There are comparison websites that can help with that.
The big decisions for most families are when to get health insurance and when to stop it.
Do you start it when your children are younger and have no pre-existing conditions, or do you wait a bit longer and take the risk no pre-existing conditions eventuate in the meantime?
At the other end of the spectrum, many elderly people with insurance are paying significant premiums, but that’s when they’re likely to face more health issues and be more likely to use the private health system.
So, the decision will be around whether they can afford to keep paying premiums on a fixed income, self-insuring (if they have the means), or reducing the type of cover to reduce costs.
Whatever insurance you have, it’s important you don’t just lock and leave it. It’s always advisable to periodically review how your needs fit your circumstances.
For me, life insurance is not as important to me as income, trauma, and disability insurance. A couple of years ago I changed all my insurances to better reflect my age and stage in life, and health insurance gives me peace of mind – even though I know we have an excellent public health system.
Being short on time in my busy life, I engage a financial adviser to help me on this journey – he’s been invaluable.
Katrina Shanks is the chief executive of Financial Advice New Zealand.