Insurance - Are you covered? All you need to know about life, income protection and critical illness cover

Insurance can keep you and your family from financial ruin. But how much do you really need? How should you prioritise different types of insurance? And what are some of the common mistakes people make when buying insurance? In part four of a Herald series, Tamsyn Parker looks into life and income protection insurance.

When Jen's husband died suddenly on the operating table from an allergic reaction to the anaesthetic she was left in shock.

But she took some comfort from the fact they had just redone their insurances a few weeks earlier with the bank.

It was only when she went to claim on Paul's life insurance and was turned down that she began to worry.

Karl Robinson, a specialist insurance lawyer at Shine Lawyers, who dealt with a similar case, says despite the cause of death being totally unrelated the insurer turned down the claim because the husband didn't disclose some tests he had done over concerns with his heart - even though the tests were clear.

Robinson says if the couple had stuck with their previous insurer rather than being moved elsewhere by their bank they would have been fine because they had been with the previous insurer more than three years and any pre-existing conditions would have been covered.

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He successfully argued against the bank and the insurer and won a settlement. But it's easy to see why stories like this can put people off getting insurance.

Less than half of Kiwis have life insurance and even fewer people have some form of income protection.

That's despite around 55,000 households in New Zealand losing their main earner's income because of illness.

We're much more likely to insure our cars, houses and personal possessions than our lives or income.

Yet over a working lifetime even an average income of around $50,000 a year can add up to $2 million or more.

Karen Stevens, chief executive of the Insurance and Financial Services Ombudsman, believes part of the reason Kiwis don't take out income protection insurance is because they believe the government or ACC will support them.

"In New Zealand we are incredibly fortunate to have ACC. For a lot of people that does stand in place instead of income protection."

But ACC only pays out if you have had an accident and been injured.

"It won't help if you get cancer. If you can't work then you will have to rely on savings or have other income."

It also won't help for degenerative health issues, which could stop you from working temporarily or permanently.

Health and disability allowances are paid by the government but they are means tested, which means if your partner works you could be out of luck or if you don't have an earning partner the money could be much lower than the income you were on.

Women are also much less likely to have insurance than men, with the biggest gap in the 18 to 34 age-group.

Just 14 per cent of women aged 18 to 34 had income protection compared to 21 per cent of men, a survey by the Commission for Financial Capability found in research undertaken in 2018.

When it came to life insurance, just 28 per cent of young women had it compared to 38 per cent of men.

It seems the cultural mores of men being the provider and the person who handles the finances is still standing in the way.

A study by Massey University found there was very little cultural support for females to ensure the financial survival of their families after an adverse event, even if they were the main earner.

"This has resulted in females being less aware of a need to buy on their own behalf, and higher-paid females less likely to protect lower-paid spouses," the report found.

With more and more women becoming either the primary breadwinner or the higher earner it's vital that they get their heads around insurance.

Tom Hartmann, managing editor of Sorted, the money advice website run by the Commission for Financial Capability, says protecting people should be a priority when it comes to insurance.

If you have others who depend on you financially, do you have something for them in place if you can't keep supporting them?

Life insurance, which pays out a lump sum upon death, is particularly important if you have a young family and a large mortgage debt.

Peter Leitch, a financial adviser at Share, says young people without dependents or big debts typically don't need life insurance but those with a big mortgage and dependents are those most exposed.

"If you are young, with three children and a large mortgage, you want to get as much cover as possible."

Likewise, older people may be able to drop their life insurance if they have paid off their debt and children have flown the nest.

Life insurance typically has a high pay-out rate with few exclusions. Payouts are likely to be declined if a person is breaking the law when they die - such as drink-driving.

Leitch says one thing that has changed in recent years is KiwiSaver. The amount people have saved in the retirement scheme has grown significantly, with balances now averaging around $20,000.

"That is a big difference over the past 11 or 12 years."

If you die your KiwiSaver money goes to your estate and could be used to pay off debt or the cost of a funeral.

That money can be taken into account when assessing how much cover you need and could bring down the amount, lowering the premiums.

Life insurance can be paid out to a specific person - and Leitch says doing your will at the same time as organising life insurance makes sense as you can decide who gets what.

Often it is the higher earner in the family who has life insurance because their death would have a bigger impact but even losing the income of a lower earner could mean you can no longer afford to pay the mortgage and bills.

In one case I know of a couple had life insurance for the husband but not the wife even though they both earned around the same amount of money. When the wife unexpectedly died of cancer in her 50s the husband wasn't able to keep paying down the mortgage by himself and had to sell their house.

Losing a stay-at-home parent can also affect a family's finances if they have to pay for the cost of childcare or other home help.

If the stay-at-home parent is too sick to help out the other parent may have to step in - leaving them unable to work.

Income protection won't help in this case but a trauma or critical illness policy could if the illness is one of those specified on the policy.

Leitch says he often gets asked if a person can't work because they are caring for a sick child or parent if their policies will cover it but the answer is no because the illness has to be for the person insured.

Income protection insurance is more expensive than life insurance and that is often cited as a reason why people don't get it.

If you lose your income due to temporary or permanent disability through illness or accident you will be paid up to 75 per cent of your previous salary for the period of cover, which could be two years, five years, or until age 65.

Related, but not as comprehensive, are mortgage protection insurance and total permanent disability (TPD) insurance.

If you are young losing the potential to earn for the rest of your life could have a huge impact.

That's why Leitch believes some form of income protection is vital for younger workers.

"If you are in a wheelchair because of an accident there are a lot of benefits you can get but if it is because of sickness there is not a lot."

He says it is often not until people get older that they think about these concerns as they see family members or people they know get caught up.

But he says needs change over time - someone who is 55 may not need as much income protection and may be better off getting a lump sum payout if they get cancer through a critical illness or trauma insurance.

IFSO chief executive Karen Stevens says trauma insurance is one of the most misunderstood.

"A lot of consumers think it will cover any trauma in their life."

That's why Stevens believes it is better for insurers to call it critical illness cover.

It only covers certain illness like a heart attack, stroke, if you become a paraplegic or get certain cancers. And the illness has to be one that is named on the policy.

"If it is not listed you are not covered."

That means even if you have a rough patch like losing a close family member, and then can't work because you are depressed it may not be covered.

Stevens cites the case of a woman who had a very traumatic birthing experience. It was life-threatening and she lost a lot of blood but it was declined as a claim because it wasn't on the predetermined list.

She says it's fairly common that people don't read their policies and don't know what they are covered for and find themselves disappointed when it comes to making a claim.

"They often find it doesn't do what they expect it to do."

She says the key to avoiding disappointment is to read the policy and make sure the product is right for you so you don't end up paying for something you can never claim on.

Sam Tremethick, chief partnership insurance officer at AIA, believes the biggest mistake people can make is not getting advice.

"It is complex so we recommend people get it.

"This is something where I think people are much better off after seeking advice."

Advice can help people figure out the type of cover they need as well as the level of cover.

He says a good adviser will challenge people's preconceived ideas and help them see things they might not have thought about.

Insurance - are you covered?:
Monday: What you need and what you don't
Tuesday: House, contents and car insurance
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