Diana Clement on investing

Diana Clement is a personal finance writer

Diana Clement: 'She'll be right' no help for those left behind

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A broker can help you choose the right policy for your circumstances. Photo / Thinkstock
A broker can help you choose the right policy for your circumstances. Photo / Thinkstock

A staggering 45 per cent of Kiwi families have no life insurance cover. None at all.

That figure comes from LifeDirect. Sure there will be a few of those who have private wealth. The remainder are too busy, too scared, or allegedly too broke to take out life insurance. How will that look on a tombstone?

Kiwis are spending less and less on life insurance. The expenditure as a proportion of gross household spending has dropped from 1.1 per cent in 1995 to 0.9 per cent in 2010, according to Statistics New Zealand's Household Economic Survey.

Of OECD countries only Greece and Mexico have lower rates of life insurance than New Zealand.

A few weeks ago I mentioned a case of a wife who learned after her husband died that he had no life insurance. He'd left his pregnant widow with a $480,000 mortgage and no insurance to cover it.

That's probably not unusual. Natalie Wang, from the school of economics and finance at Massey University, did her master's research on the issue of consumer insurance choices. She noted that those left behind after a death were often unable to manage financially and either required Work & Income benefits to survive or had to accept a lower standard of living. Some lost the family home.

The old "she'll be right" attitude is too common, says Conor Sligo, director of LifeDirect.

These disasters don't happen just when the husband dies. Even the death of a non-working spouse can be a financial disaster. A mother dies and the husband finds that he has to take time off to be with the children and pay for childcare when he goes back to work.

I sometimes feel like saying: buy any life insurance. It doesn't matter for now if the sum isn't quite right or you haven't got all the bells and whistles you'd like in an ideal world.

The argument against this is that people don't know what they're buying, which has some validity. I'm sure, however, that the widow above would have preferred her husband had bought bog-standard death cover from his bank or over the internet from the likes of LifeDirect, Cigna, Pinnacle Life, or even The Warehouse Insurance. Something had to be better than nothing.

A word of warning, however. Once you've got an insurance policy you may be stuck with it. If, for example, you've had a small skin lesion cut out, or a dodgy smear test result in the meantime, a new policy may not cover you for certain types of, or all cancers, so it's better to stick with the old policy. You can, however, add to the policy with extra cover or an increased sum insured.

Over and above buying death cover, the main questions people face are what type of cover and how much? There's a handy calculator to help to answer that at Consumer.org.nz/reports/life-insurance/calculator, although one size doesn't fit all and it is not an exact science.

In terms of type of cover, the main choices are whole of life, or term insurance. Whole of life, as it suggests, covers you no matter how long you live, but costs more. Term insurance covers you for a set period - often the term of your mortgage or until retirement.

The average level of cover taken out at LifeDirect is $350,000, says Sligo.

It's possible to buy a number of useful add-ons. The most common extras chosen by LifeDirect customers, Sligo says, are trauma (also called critical illness) cover, which pays a lump sum if certain illnesses are diagnosed, and mortgage repayment insurance. Some life policies also offer redundancy insurance as an add-on.

Mortgage protection and redundancy insurances cover mortgage payments for a set period if the policyholder is made redundant or becomes temporarily disabled.

If you become permanently disabled, some policies will repay the mortgage. Don't assume, however, that permanent disability or redundancy cover is included. It often isn't. Consumer is publishing an article about mortgage protection insurance in the coming months.

All too often people don't take their life insurance out of the bottom drawer and review it, says Peter Neilson, chief executive of the Financial Services Council (FSC). People's priorities change over time and their life insurance cover doesn't keep pace. It may be that the level of cover isn't enough. Or, as Neilson points out, their children have moved on and they'd be better off directing the money to income protection insurance or just saving for retirement.

Adds Sligo: "People are taking life insurance for different reasons. In the past, it was common to start a life insurance plan with the aim of keeping it until old age. These days, Kiwis are only taking insurance for the time they really have a need, like kids or a mortgage, then cancel the cover when this need is gone.

"This is something that we really encourage - in my view, people are much better off with this approach, and using savings for things like funeral costs."

Despite what I say about any policy being better than no policy, shopping around is sensible. Policies do differ considerably. They can also come with longlines (not just single fish-hooks) attached to them to snare the unwary.

Individuals can shop around on their own, but it can make sense to see an insurance broker or agent. Brokers don't charge the customer and can sift through the fine print to find the right policy, as well as assist with the claim if there is one.

A broker should know the ins and outs of policies such as just how many critical illnesses are covered by different companies and also whether the mortgage protection add-on you take has cover for mental illnesses, not just physical ones. One in six New Zealanders will experience serious depression at some time in their lives. Yet many insurance policies exclude this and other mental illnesses.

Johanna Pansier of Johanna Pansier Insurance has a very good piece of advice for anyone taking out life insurance: "Disclose all medical information if you want a claim paid as insurers could potentially void your policy at claim time even if the claim was for something irrelevant to the non-disclosure material. Be truthful."

If the insurance company finds out after you die that you conveniently didn't mention that lump on your testicle, or bowel operation 10 years ago, it can rely on the requirement of "utmost good faith" in the policy to avoid paying a claim.

"You won't be around to argue what you did and didn't say [to the insurer]," says Neilson.

The Insurance & Savings Ombudsman's files are strewn with sad stories about income protection and life claims declined on the basis of pre-existing conditions.

The Christchurch earthquake of February last year really brought home to many the need for life insurance. The life insurance industry paid out 101 life insurance claims from that event.

Neilson says only 60 per cent of people killed in the Christchurch earthquake had life insurance. The FSC has commissioned Massey University academics to look into the factors behind underinsurance in New Zealand.

It sometimes takes catastrophic events such as the Christchurch earthquakes to wake people from their apathy. Insurers did see an upswing in life insurance policies being taken out after the disaster.

Nonetheless consumers will only buy insurance voluntarily if it is demonstrated that the purchase will enhance their welfare, says Wang. Sadly many policies are discontinued within the first two years, she adds. These people may find it difficult to take out life insurance later if their health changes.

One factor in people's attitudes to insurance, Wang found, was personal experiences or those of family or friends. Although this did affect some respondents, many had not taken out insurance or changed their insurance after an event where someone they knew died - either with or without insurance.

- NZ Herald

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