DIY test to ensure you're covered

CONSIDER YOUR WORTH: If you went splat-under-a-bus tomorrow, stop and consider the possibility that you might actually be underinsured, not overinsured.
CONSIDER YOUR WORTH: If you went splat-under-a-bus tomorrow, stop and consider the possibility that you might actually be underinsured, not overinsured.

Naughty, naughty New Zealand. If you've been told once, you've been told 20 times. You are underinsured.

Yes, once again, Kiwi households are being berated by the life insurance industry for not buying enough insurance.

It's a familiar refrain from an industry with a patchy reputation that has failed to convince many of us that their policies are worth spending an ever-increasing portion of salary on.

In fairness, the Financial Services Council report was compiled by Massey University so there is an element of independence to it, and the broad thrust is correct, even if it is a bit unrealistic to expect households with total incomes of as little as $20,000 or $30,000 to be buying any insurance at all.

The headline figure from the report was that families' lives and income are underinsured to the tune of $650 billion. Figures that large are impossible to comprehend, but that doesn't matter.

Think of it as a REALLY BIG NUMBER, and then move on to the real question: Are you and your family adequately insured?

To answer this, you have to first answer two other questions.

First, if you, or your partner were to die tomorrow, how would your family manage?

And, second, if you, or your partner were to fall too ill to work, how would the family manage?

It's time for some hard thinking and planning, or a trip to a good insurance adviser. Remember though that advisers are paid on commission, so the more they sell, the more they earn and the more likely they'll get a free trip to Las Vegas from a grateful insurance company.

I suggest getting a piece of paper, and drawing two crossing lines dividing the paper into four equal sections headed: I die, my partner dies, I am too sick to work, my partner is too sick to work.

Then in each space under each title, work out what would happen under those scenarios. In each case, where would the money come from to continue life at a reasonable standard?

It will force you to start thinking, and researching. Questions will arise.

How would the funeral be paid for, and what exactly do funerals cost? What does childcare cost? What would happen to the rosy retirement I was saving for? Could I get money out of Kiwisaver? How would my non-working partner prepare him or herself for beginning work? What family support can I expect?

Only from a process like this can you decide what insurance is needed to protect your family, and which types of policies you judge you need - life, income protection, trauma/critical illness, and disability cover.

There are insurance calculators that can help develop your thinking. I like Kiwibank's and the Sorted calculators - but they take no account of affordability, and most families will find the insurance they can afford will only allow the family to get by should disaster strike, not continue on with the same quality of life.

Perhaps the saddest finding of the FSC report though was that there was no greater trust among those who had insurance than those who didn't.

It seems people are spending money on premiums to do the right thing by their families when they are not convinced the industry they are buying insurance from can be trusted.

Rob Stock is a journalist with the Fairfax Business Bureau and money editor for the Sunday Star-Times.