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The right insurance mix

CATHERINE HARRIS
Last updated 05:00 15/02/2014

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All of us wonder from time to time whether those insurance policies we pay for are really necessary. They can be a big chunk of the budget and all the more galling if you never lodge a claim.

Of course, if you've had it when you needed it, you're always thankful for it. Insurance can be a comfort when an unexpected operation, a devastating fire or nasty car accident comes calling.

However, covering every possible risk is unaffordable so most people need to think carefully about their mix of insurance policies.

If you have income protection, for example, do you need life insurance as well?

"Insurance is all about preserving your standard of living," says financial adviser Liz Koh.

"It will depend on your circumstances, so the thing to do is say, what if my house burns down? What if I'm too sick to work? What if I die? And look at the consequences of that, both for yourself and for people financially dependent on you.

"That can include long-reaching effects, such as your provision for your retirement. If you have to stop work tomorrow and never work again, it not only affects the rest of your working life but it also affects your ability to provide for your retirement."

It's not an easy task, which is why Koh suggests using an insurance broker who will advise on your personal circumstances.

The first step
To start with, ask yourself how much risk are you prepared to take?

Most of us self-insure to some extent. Insurance is for peace of mind over aspects of your life that you can't afford to cover, such as the Audi you might one day hit.

Your insurance needs also change with time. When you're young you might take the risk, but the picture changes as houses are bought and children are born.

Then, when houses are paid for, children leave and you retire, such policies as income protection and life often go by the wayside.

Wellington insurance adviser Peter Chote says he constantly works with people making insurance trade-offs.

"The unfortunate thing is, when people need insurance the most, they can afford it least. So the young family with two children and one of them not working and a mortgage of half a million dollars needs almost every insurance under the sun.

"But when you're older, and you've got a greater asset base, you need fewer insurances but you can afford plenty.

"And when you're 20 and your income is all your own [and] you have no need for insurance really, you can afford it too."

Income
What's your greatest asset? You might be surprised to hear that it's probably not your house or your car. It's almost certainly your income.

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On an income of $50,000, a person's lifetime earnings could easily exceed $2 million. One's major assets (house, contents and car) may only be worth a quarter of that.

Yet most Kiwis would rather insure their assets than their lifestyle. Almost all home owners and 95 per cent of car owners are insured, while less than one in five has income protection.

One of the reasons, it seems, is the expense. "All-risks" income protection doesn't come cheap, although it could be cheaper than trauma insurance later in life.

Another is a perception that the Government will come to the party. The ACC scheme is relatively generous for accidental injury, but if you fall prey to illness, a family income-tested sickness benefit is likely your only form of support.

Advisers say you should consider how much of an adjustment that would be. Someone on a low income is less likely to feel that adjustment than a high flyer or a family on one income.

Peter Neilson, chief executive of the Financial Services Council, says that after one's house and car, he'd recommend income protection as a "must-have" insurance.

"The evidence seems to be that people do look after their assets but their ability to earn and their life are less well covered, and certainly their biggest area of deficiency is in relation to exposure to sickness.

"You're 2.6 times more likely to have a period off work from sickness for more than six months, than you are for an accident but most people probably think it's about the same chance."

There are ways you can cut down on income protection costs. Specific policies for unemployment and disability are available, as is "trauma cover".

This offers an agreed lump sum to carry you through for a period of time in the event of accident like a head injury, or specific illnesses such as heart attack, stroke or cancer.

It is less help with longer-term or rarer health problems.

Chote says income protection is the policy he most recommends to the young.

"As a general rule, I think [they] ought to consider income cover before anything else, because the impact of loss of income at a young age can be terrible.

"The impact of loss of income is high, the impact of death is low from a financial perspective, because there's no financial dependency and no financial responsibility."

Life
They may not have income protection but in middle age, people do tend to have life insurance, at least to cover their mortgage and dependents.

In some cases, their bank has sold them some form of insurance with their mortgage, and it's worth checking the fine details.

Once again, the different stages of life come into play.

"If you're single and you have no dependent children, then life insurance has perhaps a much less priority than protecting your income," says Koh.

Dropping life insurance at retirement is common but Chote says there is still a place for it.

"You've got to remember couples on New Zealand super earn about $28,000 between them. When one of them dies, that drops to $14,000 and the costs remain exactly the same."

Many elderly can fall back on a nest egg, "but for all sorts of reasons, sometimes they don't."

Health
Health insurance always seems an anathema to the young and healthy, but the upside is they can usually get it without health exclusions. People also cancel their health insurance"in droves at 65" and rely on the public health system, says Chote. He tells them to consider lifting their excesses.

"Better to have to find $5000 in excess than $29,000 for the hip replacement."

Contents
About 20 per cent of us don't insure our contents. Just before Christmas, the Insurance Council used the holiday season to put out a special warning to insure one's possessions.

After all, burglars love present-laden cars, and know that presents are often laid out enticingly around Christmas trees. Not to mention the fact that many people are away from home.

Not having contents insurance is a personal decision. I've known two people whose worldly goods were not covered when their houses burned down. In one case, the homeowner was feeling the pinch and kept up the house insurance at the expense of the contents. The new house is nice but it's taken years to furnish.

Even with insurance, it's worth reviewing the level and expiry of your coverage from time to time. Insurance brokers say an alarmingly large percentage of people with contents insurance under-estimate the value of their contents, often by roughly half.

House
As mentioned before, many banks require a new mortgage holder to take mortgage protection. At its basic level, this policy ensures the bank is repaid if for some reason you are unable to meet your repayments. It won't necessarily cover you. House insurance will cover both parties.

Travel
Roughly one in five Kiwi travellers go overseas without travel insurance, particularly if they are headed to familiar destinations like China, the Pacific Islands or Australia.

One of the biggest risks when travelling uninsured is getting back home for further treatment cost. Repatriation can cost hundreds of thousands of dollars.

Don't forget to disclose any medical conditions, and if you're planning an adventurous holiday, ask your insurer whether they exclude any high-risk activities. Parachuting, anyone?

What are the odds?
Research by the Financial Services Council in 2012 shows that over the past five years:
- Nearly a third of households had someone who had been unemployed for three to six months.
- One in seven households had someone who had lost income after experiencing a serious illness which meant they could not work for 3 months or more
- Once sick leave and annual leave ran out, a fifth of households would not be able to meet all their expenses after one week
- After four weeks, 55 per cent of households would be unable to maintain their lifestyle
- Only 20 per cent of households would be able to cope for more than 12 months

- Fairfax Media

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