Articles by Steve Munro
Unless you’re single, living the high life, flying solo, and not bothered what happens to your debts when you die, then you’re going to need to have the right life cover in place.
Life insurance isn’t something that you lie in bed at night thinking about. Rather, life insurance generally comes up when you’re experiencing a significant life event, whether it be a death in the family, having a new child, buying a new home and taking out a mortgage, buying a new business, or buying into a business. And due to the nature and stress of such events, it can be very easy to make mistakes. I outline the common ones we see (far too often) below.
Putting it off or not buying any life insurance could possibly leave you in financial dire straits. Most people think they don’t need life insurance, and to a certain degree they’re right. But like any insurance, you don’t need it until the day you need it. Putting off buying life insurance until you’re older can cause numerous exclusions on your policy, due to poor lifestyle choice, chronic medical condition/s, or you may find yourself ineligible for any coverage at all.
Procrastination - “A year from now, you may wish you had started today.”
Waiting can be costly when making decisions around life and health risk protection. Most of us forget that as we age, our health eventually deteriorates, no matter how good or bad our lifestyle choices have been. Consequently, the options we have for making good insurance decisions decrease in step.
You’re better to have insurance and not need it, than to not have it and need it. If you work on this premise, you win either way.
A common thing I see is that people are under insured, and this can be a terrible mistake. Being under insured can happen for a number of reasons - maybe it's because they didn't have the money when they took their insurance out, or perhaps their lifestyle has upgraded. What it's important to realise is that your circumstances inevitably change over time, and your insurance cover needs to keep pace.
Given the current COVID-19 environment, insurance has really been brought to the fore, and the narrative across the industry (backed by academic research) confirms that most New Zealanders are under insured. Many Kiwis who do have life insurance may be too light on cover because they bought their policy many years ago and have not had their position reviewed yearly. The benefit of a yearly review is that you can increase your coverage (if needed) without going through the rigorous underwriting process, and the increase in premium may well be immaterial for the additional coverage and peace of mind it buys you and your family.
A great question to ask yourself is: “Will I keep my house in the event of needing to make a claim?” Clearly, losing your family home would be horrific, and this must be avoided. While you will possibly want more coverage to mitigate this, it’s a great baseline test scenario.
Many insurance plans will fail this test either because there isn't enough insurance, or they don’t cover not being able to work.
If you already have life insurance, it’s worthwhile checking your sum insured. If you were to die or become terminally ill (less than 12 months to live) and this amount was paid to your spouse/partner, would they still be able to keep the house? If they couldn’t keep the house on their own once this amount was deducted from your mortgage, then you don’t have enough coverage.
You will also need to consider having disability cover or, even better, have decent income protection in place, because you’re more likely to be disabled or injured than to die. Now apply the same test: Do you have enough coverage to keep the family home? Remember, just being able to pay the mortgage isn’t enough; you will still need to be able to feed your family and pay the power bill too.
Your ability to earn can be affected if your spouse dies or falls seriously ill.
Most couples will focus on what the outcome will be if the main income earner in the relationship couldn’t work for a period of time, was terminally ill, or worst case, dies. However, there’s a nearly equal affect if someone else in the household suffers a major accident, becomes seriously ill, or dies. Typically, the main income earner may have to (or wish to) take time off to care for that person, or indirectly has to take care of others in the family.
As an example, a friend of mine told me recently that a male relative of his was diagnosed with a serious illness. Clearly this is a very traumatic time for a family. However, it became even more difficult because his partner was unable to take much time off work to care for him or their children. Even trips to the hospital become difficult, and it put additional undue stress on her work relationships. Although you can’t mitigate the physical or mental impacts of health, you can certainly mitigate the financial strain on the family by having the correct trauma insurance.
What’s the lesson here? You should think about all the outcomes that could affect you and your family, and make sure you have the right plan in place.
There’s also the case of having adequate life insurance on each of your business partners. In the unfortunate event of one of them dying, the life policy can be used to buy the deceased’s shares and pay their spouse out of the business. Specific asset planning advice should be taken to explore this scenario.
Everyone’s circumstance change, and on top of that, insurance policies evolve and there are often enhancements. An insurance review makes sure you’ve got cover for the right things at the right times.
Simply setting and forgetting could see you with too little or too much insurance. Your life is always changing – think about how much your life has changed in just the last few years. When you review your insurances at key stages in life – having children, getting married or divorced, taking on additional debt, getting a promotion, increasing your income – ensure you have the right amount of insurance in place for whatever stage you may be in life.
You may have a young family with a large mortgage, and therefore you will need a large sum insured. Conversely, you will need a lower sum insured when you’re mortgage free, have savings, and the kids have all left home.
There are many different policies in the market, and a good one has the flexibility to increase or reduce your cover with no questions asked when you have certain life events.
Furthermore, if you take up a new pastime or hobby, such as skydiving, shark cage diving, cliff or base jumping, it would pay to check to your policy to ensure it’s still fit for purpose.
“Value is more important than price.”
Understanding or comparing insurance policies can be extremely complicated, not to mention time-consuming. It’s very easy to over-simplify things and compare insurance purely on price. For example, most people understand that life insurance covers you if you die, but many policies will in fact pay out if you are diagnosed with a terminal illness. Both policies may be called life insurance, but clearly they function differently.
Price is one consideration, but value is paramount. What am I getting? What benefits fit with my situation best? Other factors to consider when choosing an insurer are financial strength, underwriting, claim handling and payment, policy quality and wording, and overall customer service.
You may think you’re getting a great insurance deal, but just when you need it most, at claim time, you don’t want to encounter unexpected fishhooks, exclusions, and then not have the ability to claim.
Understanding how, who to, and when the claim will be paid is essential. Will the claim be paid directly to you, your partner, or a trust in order to pay off the mortgage?
Trusts and Wills are also important to think about when you’re reviewing or considering your life insurance.
Obviously there is a lot to think about. You need to make sure you have enough cover, and the right sort of cover. That’s where the advice of a knowledgeable insurance broker is invaluable. If you think your insurance cover could do with a review, or worse, if you don’t have any at all, contact us at Risk Direct for a no-obligation chat: [email protected] or +64 9 522 7933.
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