This is the role of insurances in your financial planning. The kinds of insurances that you will need will change over your life, when you are younger, with debt and financial dependents, you are likely to need life insurance cover, as well as more complicated ‘living insurance’ covers.
If you have no dependents, you may not need any life insurance, and our goal with our clients is for them to build up financial assets, to start reducing the level of life insurance cover in the years prior to retirement with the goal that there is no need for life insurance by the time that they retire.
This is a list of the main insurances – listed in order of priority in our opinion:
Fire & General Insurance
Income Protection and/or trauma insurance
Most people are aware of the need for Fire & General insurance – if you have a mortgage, you will be legally required to have house insurance. You may also have car insurance, home contents insurance, boat insurance, professional indemnity or public liability insurance. This is a specialist area of insurance that Moneyworks don’t operate in, but we can refer you to a top quality insurance broker.
Some general pointers – you generally get what you pay for, cheapest is not necessarily the best. Secondly – make sure that you have your house and house contents policy with the same insurer. The policy documents from different insurance companies can have different wordings. One company might say that your floor coverings are part of the house, another might say they are part of the house contents. If your house burns down, you will want to make sure that everything is covered. By having the two policies with one insurer, you have a higher degree of certainty that they will be covered.
Income protection and/or trauma insurance
These are also called ‘living insurances’. They pay out when you are still alive, but can’t work because of ill-health or injury. For more information, go to our articles here. For our clients, we recommend a combination of these insurance covers.
Not everyone can get income protection insurance, a number of occupations are not able to be covered because of the nature and risk of the work or of the income.
To have income protection insurance cover, you need an income to protect. These policies will pay up to 75% of your income (generally based on the highest consecutive 12 month income in the last 3 years), if you are unable to work because of illness or injury (not redundancy).
The cost of the income protection cover will depend on the following: Your
Age - the older you are, the more expensive the policy will be
Male/Female – female income protection cover tends to be more expensive than males (whereas male life insurance cover is generally more expensive – is it because men don’t go to the doctor until it is too late?)
Occupation – the more active and hazardous your work, the more risk the insurer has so your cover will be more expensive. A builder will be more risky for an insurer than an office worker.
Income - the higher your income, the higher the benefit needed, therefore more risk to the insurer, so the premium will be higher, as the payouts are likely to be higher.
Health - (there might be extra payments required as a loading, or a pre-existing condition might be excluded)
Wait period - (4 weeks, 8 weeks, 13 weeks, 26 weeks). This is how long you can wait before you get a payment. To work this out, you need to work out how much sick leave, annual leave you have, how much you have saved that you can live off and how much other income is coming in to your household. The longer you can wait, the lower the premium.
Benefit period (to age 70, to age 65, 5 years, 2 years) This is how long the benefit will be paid after you become sick. The longer the benefit is, the more expensive the policy is. However, think carefully about taking shorter benefit periods, if you are off work for 2 years, are you likely to be going back to work? You don’t want to save a few dollars and then find that you don’t have any income after 2 years, and you still can’t go back to work.
There is a big difference in the quality of income protection cover, and Moneyworks uses an independent research company to assess the quality of cover, as well as our own ongoing research. Your income protection insurance will work in conjunction with ACC in New Zealand.
Trauma insurance protects you for a lump sum that you choose. This can be between $10,000 and several million dollars. If you are then diagnosed with any of the conditions that the policy covers, you will get an insurance payout.
There is a big difference in quality of cover, from basic policies that cover 6-10 core conditions, but with wording that is difficult to claim on, to extensive policies that cover a number of conditions with wording that is easier to claim on.
It is important that your policies keep up to date with changes in medicine and the environment. We recommend that our clients use products from insurers that have ‘policy wording passbacks’ to make sure that their policies continually stay fit for purpose.
Life insurance is something that you have in place for people you love. While there are some differences in quality of life insurance, most products are similar and if this is the only insurance that you are going to have in place, the most cost effective cover for you is probably the best.
To work out how much life insurance cover you need, you need to calculate the cost for a funeral (about $15,000 these days), how much you need to repay any debt and how much you will need to replace your income for your survivor (if that is relevant. Not everyone needs life insurance and as you build up your assets and get rid of your debt, the level of life insurance that you need will reduce.
This is a ‘nice to have’ and if you can afford to have it, then we recommend that you do. However, if you only have health/medical insurance and you become too unwell to work, and can’t pay your premiums, the insurer isn’t going to feel sorry for you and continue to pay the premium. This is why we have ranked income protection/trauma insurance higher on this list of priorities.
If you can afford to have health/medical insurance, again there is a big difference in the quality of cover. We meet very few people that get value out of having cover for doctors/prescriptions etc, it tends to be a ‘dollar swapping’ exercise.
Most people can get good value by having major medical and specialists insurance cover. The price will change depending on how much excess you can afford to pay – nil excess will cost a lot more than a $1,000 excess. But again, this will depend on your situation. Moneyworks uses independent research to keep up to date with the features, benefits and pricing of these insurance covers for our clients.
If you don’t have a complete financial plan, this may be an option that you wish to have. For Moneyworks clients, we prefer to work with them to set aside funds from their investments to pay for a funeral.
If you want to look at funeral insurance, you might find that full life insurance policy is better quality (we have arranged this for several of our older clients instead of funeral insurance – where is it more relevant than putting aside some of their assets.)
This is a relatively expensive insurance cover and a specialist cover, and you can’t put it in place if you are anticipating that restructuring in your workplace is going to mean that your role will be dis-established. It needs to be in place well in advance, and the benefit is usually only 6 weeks of the insured benefit. For many clients, it is better putting in plalce a full financial plan and ensuring that you have emergency cash in place.