Insurance Basics Guide

When we discuss products that protect your Life, Health or Income we are often concerned with events that are rare but that does not mean they are low risk. Risk in this case involves two parts, the first is the likelihood of the event which in many cases are low but the second part is the severity of loss when that event happens which in many instances will be extreme.

What is the value of all your future income? And how likely is it that you may not be able to work for a long period of time? or ever? who else relies on your income?

Need to apply this to real life? Before you reach the current retirement age of 65 there is approximately a 17% chance you will die, a 27% chance you will suffer temporary disablement a 9% chance of suffering total and permanent disablement, and a 25% chance you will suffer a critical illness (cancers, heart attacks, stroke, neurological diseases) .

How would you and/or those who rely on you be affected?

The public system can do a great job for emergency care, ACC can cover you for accidents, for pretty much everything else you are on your own without insurance. It might be a good idea to look up the current levels of government benefits and decide whether you could live on them.

The risks are real, and the financial costs are real. Insurance is way to offset the risk of financial loss in these often rare events.

When it comes to insurance many Kiwis have little to no understanding of the what, when, why and how. This is leaving their Life, Health and Income unprotected.

The purpose of this guide is to go right back to step zero and give all the basics which illustrate why having insurances is simply sound personal finance decision making.

So insurance… what the hell is it?

Insurance is a financial product that offsets risk (a phrase you will see repeated often here) involved with a possible event.

Imagine rare event “x” which is so rare that only 3% of Kiwis will experience it each year, but when event “x” happens it will cost those Kiwi’s up to $100,000

A new company called “x Insurance” pop’s up with a new product that pays you what is called a “benefit”, that is $100,000 if “x” happens to you.

How much would you be willing to pay to offset the risk of “x”?
Keep this in mind throughout the guide.

This highlights the concept of insurance, simply paying to offset risk.

The products available can vary between providers so within this guide I have covered the 5 major product types:

1. Life Insurance

2. Income Protection

3. Critical Illness (Trauma)

4. Health Insurance

5. Total and Permanent Disablement

What is it?
Life Insurance would be the most straightforward products under the umbrella of “Personal Risk” insurance products. This simply pays a lump sum if you were to die prematurely or were diagnosed as terminally ill.

Why do I need it?
To offset the risks of you passing away prematurely. Who would pay your debt (mortgage)? Is someone reliant on your income? As we said in the intro there is a 17% chance you will pass before retirement age.

1 in 8 men, and 1 in 12 women over the age of 30 will die before the age of 65.

When should I get it?
Not the easiest question to answer because as you will see with a lot of these products, When you need them, and when you should get them can be two separate things. The the more simplistic answer is when you have something to protect, and when they are affordable to you.

You should also consider that while you are younger you are more likely healthier, and more likely to be approved for cover or be able to lock in a lower premium for the long term. Insurers reserve can exclude pre-existing conditions, place a loading on premiums to cover the increased risk (meaning they increase the cost by a percentage) and even defer or deny your cover. That goes for all the products in this guide.

When you have something to protect like a family, or you have taken on significant debt (like a mortgage) you have a need for Life Insurance so that in the event of your untimely passing your loved ones are not financially burdened with your lost income, remaining debt, or both.

How should I do this?
How much is the most common question here, you should consider all scenarios if you were to pass prematurely. You want enough cover to pay off any debt, funeral and legal costs, replacement income if others rely on that income, child care costs and education funds are a good idea to consider. There is no one size fits all but think about what your plan would be, what is your desired outcome? and that should help frame your cover requirements.

Quick Tip: Your student loans are forgiven if you pass away so leave these out of the equation

How to pay for it… premium options!
You would have heard some insurers ads on TV boasting about their life insurance with “premiums that don’t increase age”. The reality is that this is not a unique, most major insurers offer Level Premiums which stay at the same price for a specific period of time e.g. 10 years, to age 65 or 80. Where standard life insurance products will progressively increase annually that is often called Rate for Age or Stepped. Rate for Age will always be the cheapest option when you first start looking at Life Cover, but Level Premium will offer significant savings if you keep these in place for the entire level period (10 years, to age 65 or 80). Neither of these options are better than the other, they simply serve a different purpose and most people would want a mixture of the two options.

Level Premiums - You should use this for the amount that you will need to keep in place long term i.e. when will your mortgage be paid off?

Rate for Age - This should be used to cover debts and expenses in the short-medium term keeping in mind that over time your mortgage will decrease, your kids will get older and not require as much financial support, and other assets like your KiwiSaver and savings may increase.

What is it?
Income Protection provides a monthly payment to replace your income if you are unable to work through illness or injury. This is not a blanket insurance to keep your income in place no matter what e.g. economic downturns, pandemic... although Redundancy benefits are also available but those are quite limited. Income Protection is really for illness and injury. Remember ACC is the Accident Compensation Corporation and only covers accidents. You are 2.5 times more likely to be off work long-term (6 months +) with an non-accident related health issues.

Why do I need it?
Your income is likely your biggest asset by a big margin. If you forecast your future income and by comparison look at the value of your home (or future home) then you should clearly see why this is extremely important. Would you entertain the idea of not insuring your home because few houses burn down?

98% of homeowners insure their property, 95% car owners insure their vehicles…
yet only 1 in 5 kiwis insure their income

Make better financial decisions NZ, offsetting your risk using insurance is a big part of financial success.

When should I get it?
When your income rises to a level that exceeds government benefits by a significant margin and the premiums are affordable. Don’t put yourself under financial pressure to protect yourself from potential financial pressures in the future. Affordability is key.

How does it work?
There are two key options with income protection; they are the waiting period and the benefit period which you can choose.

The waiting period is the amount of time between your claim event and when monthly payments begin. This comes down to how long can you survive comfortably is you are unable to work, consider cash saving, liquid assets and any leave allowances from your current employment. To keep costs down extend the wait period as much as you can given your situation.

The benefit period is the amount of time you will receive the benefit for the options are generally 1, 2 or 5 years or to retirement age (paid to ages 65 and 70 often available). Your age plays a large roll here, if you still have a long working life ahead of you then a longer benefit period is preferable, but longer benefit period the higher the premiums.

HEALTH INSURANCE

What is it?
New Zealand’s public health system does a great job taking care of kiwis who need urgent care, and ACC can give you access to private health facilities in the event of an accident but for everything else you will need health cover. Private Health Insurance can give you access to the best possible medical treatments in New Zealand including treatments not publicly funded (or subsidised) and even Overseas. The products do vary quite a lot.

Why do I need it?
For non urgent treatments or elective treatments there can be long delays as you sit on a waiting list for the treatments you need, longer waits result in worse health outcomes for Kiwis. Financially your income is a massive asset, but your health plays a large role in being able to earn that income. If you want to ensure that you have access to the best medical services available and when you need it, you need private health cover.

Over 26,000 new cases of cancer were registered in NZ (2018)
Approximately 8800 are between 25 and 65 each year

ACC and “merging like a zip” are the two most commonly misunderstood concepts in NZ. ACC can provide great solutions and access to private health treatments. But remember they are the Accident Compensation Corporation, they are here to help you with accidents… that is what they do.

When should I get it?
The application process for Health Insurance requires disclosing all of your relevant medical history (as do other product) and past events can often result in exclusions and/or loadings (you are required to pay a higher premium). So the earlier you take up health insurance, the better, as you are fit and healthy (hopefully). Waiting and having a range of serious past or present health issues could mean that insurers will not cover you.

If you have children you should consider placing them on your health insurance policy or their own.

How?
There are a lot of options and different product types and it really does pay to seek the free advice of a registered financial adviser. You can do your homework first of course and compare the benefits between providers, they are easy to find on their websites and brochures.

Your excess level will be the main decision you need to make which is the amount you will pay in the event of a claim and this will likely range from $0 to $5000.

e.g. You make a claim for a surgical procedure with a private hospital and that treatment comes to $45,000 and your policy has an excess of $1000 on it. You pay the $1000 and your insurer pays the remaining $44,000

The higher excess you select the lower your premiums will be. Consider how much cash do you have on hand if you needed to claim.

What is it?
Critical Illness or Trauma Cover will pay a lump sum if you suffer from a serious medical event. Commonly this would include cancers, stroke, cardiac events among many others (check your policy for specifics). This benefit can be used as you see fit whether that is to take time off work, contribute to medical expenses or to meet ongoing financial obligations.

Why do I need it?
We all like to think that we are healthy and these types of things won’t happen to us, but the fact is they happen to people of all ages. When they do they can put you and your loved ones under financial pressure. The heartache of this happening cannot be stopped but you can make sure the financial stress is taken care of. As this is a lump sum payment it can be used to give you the best possible path to recovery.

10.3% of men and 6% of women are diagnosed with a serious heart condition before 65.
3.3% of men and 1.9% of women are diagnosed with a stroke between 55-65.

When should I get it?
Often this would be taken out in conjunction with an income protection policy as you can be paid the benefit reasonably quickly and you may have a 13 week + waiting period on your income protection. You may also take out a trauma policy if Income Protection is unaffordable, or for you cannot get approval for Income Protection.

As with a lot of these covers the best time to get it is while you are healthy so that you cover is not affected by specific exclusions.

How much?
Most people take between $50,000-$100,000 unless you are using this instead of other covers, 12 months income is also a commonly used measure.

Some providers also offer severity based options which means that you are paid a portion of the sum insured based on the severity of the event. These products are a bit more complicated however so seek professional advice.

What is it?
This will provide a lump sum payment if you are diagnosed as Totally and Permanently Disabled. This event would have a serious impact on your life and the funds will not only help cover lost income, financial obligations or health costs. Funds will also help make modifications to your home to allow you to best adjust to your new life. Definitions you are required to meet for a TPD claim can vary between providers and products.

Why do I need it?
This event would mean that you may not be able to work again, and you would be put under extreme financial loss especially if you do not have any other cover. Common definitions that need to meet to make a claim are loss of limbs/sight, significant cognitive impairment or inability to perform multiple daily living activities (dressing, washing, eating etc.) you will need to look at the specific wording in the policy document.

How?
There are generally two types of TPD cover they are “Any Occupation” and “Own Occupation” which basically mean you have different definitions to meet to be able to claim the benefit. “Any” essentially means you are unlikely to return to work in any occupation, and with “Own” it means that you would be unable to ever continue your work in your own occupations.

”Any Occupation” cover is obviously a harder definition to meet, therefore making your premiums cheaper but most would see the benefit of paying extra to be covered for your “Own Occupation”.

Consider how much you would need to live off and also consider increased costs due to possible ongoing care required. KiwiSaver withdrawals are possible in the instance as well.