Shelley Hanna: Incentives not as good as they seem

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Q. I have read that you can get up to $100,000 of free accidental death benefits with KiwiSaver. Is that a good deal?

A. Investors will remember the bad old days last century when insurance brokers sold endowment policies providing a modest level of life cover plus a lump sum at some distant future date.

Trying to calculate the performance of your investment was well-nigh impossible, and with no disclosure how were you to know how many thousands went in commission to the salesperson before they made it to your savings account?

I thought we had successfully unbundled investment and insurance, and put each in its rightful place so that the consumer can measure the value of each separately. But old habits die hard, and there are currently two companies still tossing in a bit of insurance with your KiwiSaver investment.

Firstly, Grosvenor offers a limited accidental death policy with their KiwiSaver scheme through Fidelity Life. The benefits are only available to contributing members aged between 10 and 65 who have less than $10,000 in their account at their time of their accidental death, in which case their KiwiSaver balance will be topped up to $10,000.

Contributing members under the age of 10 will have their balance topped up to $2000. This accidental benefit is worth very little, as most contributing members will have more than $10,000 in their account by now.

Now AMP has upped the ante by announcing "up to $100,000 of free accidental death benefits" for existing and new KiwiSaver members who join before the end of 2014. New Zealanders love to get something for nothing, so this offer is likely to turn a few heads. Look more closely and you will see that it is not nearly as generous as it sounds. The level of accidental death cover is only equivalent to your KiwiSaver balance at the time of your (accidental) death, up to a maximum of $100,000. As most KiwiSaver accounts are still well short of that, the deal quickly loses some of its lustre.

You may think never mind, my balance will get to $100,000 one day. It seems AMP has thought of this too, as the free accidental death cover ends at the end of 2015.

KiwiSaver schemes should be chosen based on easily comparable features such as performance, fees and communication, after considering your risk profile and any investment preferences. A KiwiSaver scheme offering an incidental incentive possibly does not compare favourably in those areas, so they are looking for other ways to attract and retain clients.

Banks have led the way in this area, switching investors into their KiwiSaver schemes with the most frivolous argument that "you will be able to see your balance online". Investors have abandoned their previous scheme (which probably gave them online access anyway) for a bank scheme, sometimes without even realising what they have done.

This aggressive poaching of other companies' KiwiSaver clients by the big banks has reached new heights over the past year, making up a large share of the $1.4 billion switched in the year to June 30, 2014.

AMP's "free accidental death benefits" carrot looks like a somewhat desperate strategy to win back some of those customers.

In his recently released KiwiSaver Annual Market Report, financial writer David Chaplin takes a look at the high level of switching from one scheme to another.

• Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not intended to be personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz.