Are you covered? What insurance you need and don't

Insurance can keep you and your family from financial ruin. But how much do you really need? How should you prioritise different types of cover? And what are some of the common mistakes people make when buying insurance? In part one of a Herald series, Tamsyn Parker asks the experts for some key starting points.

We've all heard the horror stories.

The couple that got stuck with a huge hospital bill after an accident on an overseas holiday. The family who lost everything after a house fire. A widow's three-year battle to get paid out after her husband's terminal cancer diagnosis.

Insurance. It can save you from financial and personal disaster - but it can also be confusing and costly.

Consumer New Zealand has said Kiwis are paying more than ever for insurance, but they're not getting a fair deal.

In a survey last year, Consumer found people were unsure about what cover their policy gave them , and what they were getting for their money.

It also found one in four had had a problem with their insurer - the top complaint was having a claim unreasonably declined.

Last year more than 3800 complaint inquiries were made to the Insurance and Financial Services Ombudsman - an increase of 13 per cent on the prior year.

And the Government recognises the issue, last month announcing a raft of proposed changes to insurance contract law.

The main change is that the onus will be on insurers to ask the right questions when it comes to applying for new insurance, and requiring contracts to be easily understandable.

Protection for consumers will also be strengthened against unfair terms in contracts.

Commerce and Consumer Affairs Minister Kris Faafoi has said the current law was outdated and many policies were complex and difficult to follow.

He said consumers could be buying insurance policies they didn't understand, were poorly suited to their needs and "can leave them in the dark about what they should disclose to their insurer".

He's not wrong.

To help unravel the confusion, the Herald tackles insurance in an in-depth series this week.

We dig into home, health, life, travel and car insurance - outlining the facts, the myths and discussing what kind of cover you need.

And on Wednesday we host a live chat with an expert to answer all your questions.

Many of us are sold insurance on the basis of fear but experts say it should be about peace of mind and doing what you can afford.

Tom Hartmann, managing editor for Sorted run by the Government's money education arm - the Commission For Financial Capability, says when it comes to deciding what type of insurance you need the most he recommends prioritising the protection of people first, then your money and stuff.

Life insurance, income protection, trauma or critical illness or disability cover are there should something happen to you which stops you from earning and can provide your family financial support when they most need it.

"If something happens to you and you are the main breadwinner what is it you want for those you leave behind or can't support anymore?"

It might be having a replacement income to allow the kids to get through their schooling or a lump sum paid out so the family can pay off a mortgage and don't have to sell the house.

Even an average earner on around $50,000 a year has the potential to bring in over $2 million in their working lifetime.

"If you look at the earning power until you retire it is quite substantial. If you had another asset like a house that was worth $2m you would insure it."

Yet only around 15 per cent of Kiwis insure their income. Kiwis are much more likely to insure their car with 77 per cent of us taking out a vehicle policy although many of those involved in a ding with an uninsured driver would like to see it made compulsory.

Hartmann says some may not need to cover "people" if they don't have dependents or a large debt to worry about like a mortgage.

"If you don't have people that depend on you it is quite possible you don't need to cover people."

Protecting your money could be as simple as taking out third party car insurance so that if you hit that Porsche or Lamborghini you aren't hit in the pocket with a $50,000 repair bill.

If you can't afford to replace your vehicle if it gets written off then full car insurance protects against loss.

But Hartmann says not everyone needs to have the kind of insurance that covers their stuff.

If they don't have things of any real value they may not need contents insurance or if there are only a few items like a lap-top, insuring that item can make more sense.

Most people can't afford to shell out to rebuild their home if it is burned down in a fire or damaged by a flood or earthquake.

That is probably why house insurance is one of the most widespread. Yet some people whose homes were damaged by the Canterbury Earthquakes didn't have cover.

If you don't have private house insurance this means you will also miss out on a pay-out by the Earthquake Commission.

Hartmann says people need to know how to make insurance work for them.

"We recommend people work with an adviser."

Many people worry about the cost of using an adviser or worry they will get sold insurance they don't need.

Hartmann says most advisers are going to show you the Rolls-Royce version of what is on offer first.

"It's then up to people to say 'I don't want you showing me the Rolls-Royce-Ferrari version - I need to see the Toyota'."

He says people should be upfront with their money plan and how much they are prepared to pay.

"They [advisers] are very good at finding something within your budget. They are trained to do that."

Insurance advisers are typically paid on commission by insurance companies with upfront commissions on new life insurance policies ranging from about 170 to 210 per cent of the first year's premium - a level which the industry is under pressure from regulators to bring down.

Premium costs can be reduced by changing the excess - the amount of money you have to pay first - if something goes wrong - increasing the stand-down time or taking out a lower level of cover.

"It could be you take out life insurance for three to four years rather than the next 10."

Tim Fairbrother, a financial adviser at Rival Wealth, believes health insurance should be down the priority list below income and life insurance.

"The public health system is pretty good despite its issues."

He says younger people are more likely to have an accident in which case you will be covered by ACC.

"Not many 40-year-olds are having hip replacements."

"I really encourage people to go for higher risk cover especially if they have a mortgage and family."

But he says culturally New Zealanders tend to go for health first. Around 35 per cent of Kiwis have health insurance.

For those who can afford it Fairbrother says the pay back on health insurance is worth it but it also costs more as you get older.

READ MORE:
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• Insurance market not working for consumers says watchdog
• Insurance expert's warning to New Zealand homeowners
• Why we insure our cars but not our income

Hartmann says health insurance gives people more flexibility.

"It gives them the option not to wait on a public queue."

But it doesn't make his priority list of covering people, money and stuff.

What about being over-insured?

There are definitely cases where people accidentally take out two life insurance policies or have over-lapping cover. That is where an adviser can help.

But not reviewing your insurance regularly can also lead to being over-insured.

Hartmann cites the rise in people's KiwiSaver balances that should be taken into account when it comes to how much life or income protection a person needs.

KiwiSaver has a financial hardship clause that allows people to take their money out under certain conditions if they can't meet their day to day living costs.

Providers will also pay money out early if a person has a terminal diagnosis and when a person dies their KiwiSaver money becomes part of their estate and is passed on to whoever they will it to.

Hartmann says many people choose to self insure. While some might take out insurance to cover their phone being damaged others just wear the cost to replace it.

It can be the same for a windscreen in a car insurance policy.

"The risk doesn't go away but we do need to decide how we are going to handle that."

Having some savings in place makes it much easier to self-insure as that money can be tapped into first to replace or fix items as well as dealing with other financial emergencies.

Hartmann says a good financial adviser is not only there to help work out what insurance you need but when it comes to making a claim and he suggests asking how successful and experienced an adviser is in making claims before deciding whether to use their service.

What about under insurance?

The insurance industry talks up widely the issue of under-insurance each year and even Treasury has got in on the act with figures released about under-insurance in the house insurance space after the move to sum insured - where a house is insured for a certain amount rather than whatever it costs to rebuild it.

In 2016 Treasury estimated 85 per cent of houses were under-insured by an average of 28 per cent equating to $185 billion in under-insurance - more than the amount of money owed in mortgages.

That would mean a lot of people wouldn't have enough insurance cover to pay for the full cost of rebuilding their home if it was permanently damaged in a disaster.

But Hartmann says talking about this under-insurance issue can have a negative impact as it normalises the fact others don't have that insurance and reinforces the behaviour you are trying to overcome.

"It is about people's priorities.

"The products aren't perfect and are really complex. So it's good to ask 'is this doing what I need it to?"

Biggest mistakes made

Hartmann says one of the biggest mistakes people make is leaving it too long to get insurance which means it costs more.

The likes of health and life insurance are based around age and pre-existing health conditions and cost more as you get older and claims become more likely.

At the other end of the scale Hartmann says people also keep some insurances for too long.

They have life insurance but don't have dependent children or a big debt anymore and so the need to have it may no long be as great or necessary at all.

Another mistake is thinking that once you have got insurance in place that it's sorted.

Insurance is not a set and forget situation - it needs to be reviewed regularly as things change and particularly when big life events happen such as having a baby, buying a house, getting married or divorced.

Hartmann says it's not necessary to have every type of insurance but it's important to think about what could go wrong and how you would cope if it did.

"It's about assessing what losses you could absorb and what would cause serious financial hardship and would therefore be wise to have cover for."

Having no insurance or being under-insured can cause a lot of stress and throw families into debt that can take years to climb out of.

INSURANCE - ARE YOU COVERED?:

Monday:

What you need and what you don't

Tuesday:

Wednesday:

Health insurance

Thursday:

Life and income protection insurance

Friday:

Travel insurance

Saturday:

All your insurance questions answered plus the best tips and advice from the experts