Not a client of Zenith but still worth a watch as many people don't truly understand the value of insurance advice until they have to make a claim.
Not a client of Zenith but still worth a watch as many people don't truly understand the value of insurance advice until they have to make a claim.
(Source: NZ Herald: Jun 30, 2012)
Half of all adult Kiwis have life insurance. They can imagine the catastrophe if the family breadwinner died.
Yet we face a much bigger risk financially than death. That is losing the breadwinner's income through "disability" from illness or accident. As I wrote a few weeks back, ACC will replace income in cases of accident. Yet Kiwis are much more likely to be prevented from working through illness. Just look at the people in hospital beds - most are there through illness.
Online research by insurer AIA last year found that 87 per cent of us have car insurance, 50 per cent life insurance and only 11 per cent income protection insurance.
Ask any insurance broker and the stories come tumbling out. Michael Cave, managing director of Cave Financial Consulting, cites the case of a 47-year-old customer who suffered a stroke while playing Pictionary. The man couldn't return to work in his profession as a rock driller for the rest of his life.
Thankfully his income protection insurance will support him financially until retirement.
Income protection insurance is quite simple. 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.
People will often take life insurance cover and reject income protection insurance as "too expensive", says industry analyst Russell Hutchinson of Chatswood Consulting, even though it is the more valuable cover. They underplay their chances of having an accident or falling ill.
Other common reasons that people don't take out income protection or related insurances, says Cave, are that they:
* don't know what it costs
* get confused by analysing too many policies, or
* fear they won't be covered for an illness they've suffered in the past.
The irony, says Cave, is that most people would take out insurance to cover a machine in their business that would produce $1 million worth of net profit over the next 20 years. Yet they don't cover their own income, which is worth roughly the same.
There are two main ways to buy income protection insurance: through a bank, which will usually only sell its own policy, or an insurance broker (financial adviser), who will sift through a number of policies from insurance companies.
As a very broad-brush statement, the bank policies may be cheaper and often include redundancy cover for the mortgage, but can have more exclusions.
The advantage of an insurance company policy is that it will usually be more flexible, and providing clients disclose all relevant medical history, they will be covered for all conditions unless specifically excluded. Someone like Hutchinson, who has asthma, may have that condition excluded or the premium loaded to cover it, but he will know what he's covered for in black and white. Or at least he will if he has read and understood the policy, which too few people do.
Knowing exactly what you are not covered for gives you the ability to say, "Hey, I don't think that's fair", when the policy is taken out, says Conor Sligo, director of LifeDirect.
I can hand on heart argue that it's best to buy income protection and related insurances through an insurance broker. A professional who deals with this insurance day in, day out can help navigate the matrix of options, which would fill the rest of this page if I spelled them all out.
Some of those options are straightforward, such as:
adding trauma cover, which pays a lump sum if you're diagnosed with a named illness
waiver of premium benefits - so that your premiums are paid when you're off work
whether you want to cover your own occupation or any occupation, and
if you want your KiwiSaver contributions covered.
Other more complex considerations include "buyback" options, which allow the cover to be reinstated after a claim. Some people may need cover for working overseas, or if returning to their home country to live after being permanently disabled, says Sligo,
A broker will ask whether you want premiums that are fixed for a certain number of years, says Cave. And insurers such as AIA, Tower, and Sovereign offer various "split cover" options, which may, for example, cover your mortgage only for the first 13 weeks and then your income after that.
Another thing to be aware of is that most policies cover "indemnity". That means you only get 75 per cent of your current income if you're incapacitated, even though you may be paying premiums on a higher salary you were getting when you took the policy out.
For this reason some people choose an "agreed value" policy, where the amount to be paid is set in stone at the outset. This is particularly important for self-employed people who may keep their income artificially low.
Income protection insurance isn't anywhere near as cheap as standard life insurance, which sometimes puts people off. Some cover is better than none, however, and the price can be cut back by increasing wait periods (which are much like excesses), or reducing cover, Hutchinson says.
Policy costs are the length of the proverbial piece of string. I spent quite a bit of time this week playing round with hypothetical scenarios at Quotemonster.co.nz, which insurance brokers can use to compare policies (Quotemonster.co.nz is not open to the public but the Lifedirect.co.nz system is based on the same database of policy details). A policy for a 45-year-old employed male covering $50,000 income (75 per cent of the total) for claims of up to five years with a four-week stand-down period would cost from $76 a month - providing he didn't work in a high risk industry.
Add $100,000 of "trauma" cover and then the premiums move up to $141 a month. Change the stand-down period to 13 weeks and the premium drops to $102 a month. Reduce the trauma cover to $50,000 and the premium drops further to $75.
Some people prefer to cover themselves to age 65 instead of for a maximum benefit of five years. Using the same scenario above with $50,000 trauma cover and a 13-week stand-down period, the monthly premium for a five-year benefit period is $75.26, and to age 65 is $90.
The trick with insuring to age 65 is that more than 90 per cent of claims are concluded within two years, says Hutchinson, which means that you're paying to insure against a risk that isn't as likely as you may think. Nonetheless it gives people peace of mind.
It's unusual for insurance company policies to include any type of redundancy cover. Asteron does, however. For the above income protection scenario the Asteron policy with $3000 a month redundancy cover for six months cost $40 more a month than it would without.
My final word on cost is that in some cases income protection insurance premiums are tax-deductible, which brings the cost down indirectly.
There are, of course, fish hooks with income protection insurance. For example, if ACC pays weekly compensation following an accident, then the income protection policy won't pay. This is more logical than it sounds. Insurance companies factor in ACC when pricing the premiums, says Cave.
Conversely, if the loss of income is due to redundancy or illness, the income protection payout will usually cancel out any Work and Income benefits.
Another not uncommon issue is claims declined for non-disclosure. In one case heard by the Ombudsman last year a company turned down a claim on the basis of "non-disclosure" because it said that the client hadn't properly revealed a "sore hand" a decade earlier.
The insurance company argued that it wouldn't have provided cover for the hand had it known about the non-disclosure.
Insurance companies may void the entire policy from inception in cases such as this.
They can also decline an unrelated claim on the basis of "non-disclosure".
Zenith Financial Group has recently relocated and upgraded its Auckland office to Titirangi, West Auckland. The team are happy with the move which will afford visitors far more parking options than our Parnell office in addition to a more suitable office configuration.
Please note our land-line number has changed to 09 8178814 and should be up and running soon.
We are located above Vevo Cafe on Level 1, 402 Titirangi Road, Titirangi, West Auckland. Pop in and say hi!
It's probably your biggest bill but too few people realise how much money they could save if they put some thought into managing their mortgage. Do you have the right interest rate, loan structure and term? ASB's head of wealth advisory, Jonathan Beale, recommends not being too hung up on getting the lowest interest rate available. Do you value the certainty of knowing what your payments will be? If so, you likely want to fix for a longer term. If you think your circumstances could change a shorter-term rate might be better. Keeping a portion floating is a good idea for those who receive commission or bonus payments because it enables them to pay off a lump sum any time.
Interest rates are low at present, from 5.59 per cent for a year and are likely to move up over the coming years, so it makes sense to fix at least part of your loan on a longer term. Consider dividing your loan into smaller pieces that can be fixed for different periods to take advantage of cheap rates and long-term security. When refixing your mortgage, don't fall into the trap of extending the term.
"Lots of people take out a 25-year mortgage then two years later the rate comes up for renewal and they take out another 25-year mortgage when they should be taking a 23-year mortgage and trying to reduce that. It makes a big difference to how much interest you pay over the life of the mortgage," Beale says.
If you're disciplined, you could consider a revolving credit facility. This is like a big overdraft and means you use the money in your everyday transaction account to reduce the size of your loan. It might work like this: You have $50,000 of your loan as a revolving credit account. During the month, you put all your everyday purchases on your credit card. During the month, you have salaries of $6,000 credited to the transaction account. At the end of the month, you withdraw the money from the transaction account to pay off the credit cards. It means the $6,000 that was credited to your account during the month and sitting there until you paid off the credit card reduced your home loan and meant you weren't charged interest on it for that period. Beale says: "The advantage is you're reducing the debt amount that they're working out the interest on but you've got to be very focused on, 'I'm using this to reduce my interest payment and reduce what I pay'."
Offset mortgages work in a similar way. Savings accounts are linked to the mortgage, reducing the total loan amount. The savings accounts won't earn any interest. This is great if you know you're saving for something, such as your kids' university fees, but you worry you might not have the discipline to have the money sitting in a transaction account where it's accessiblThe money you put aside in a separate account can still be used to reduce the total you owe the bank. In some cases, you can link the loan to other family members' accounts. If your parents are willing to forego the interest on their $50,000 savings account, for example, you can reduce the amount of the loan you're paying interest on by $50,000. However you structure it, paying more off your mortgage than you have to is one of the best financial decisions you can make. David Boyle, group manager of investor education at the Commission for Financial Capability, says people should realise that extra payments can make a huge difference.
Any extra you pay will go directly on to the principle you owe, reducing the amount that is charged interest over the life of the loan. "The longer you have debt, the power of compounding works against you. If you pay a little extra fortnightly or monthly, the impact can be quite significant over the term of the loan."
The home loan market is competitive. If you think another bank is offering a better rate ask your bank to match it. Many banks also offer incentives such as cash and TVs to those who switch.
• A $500,000 loan paid off at $1652 fortnightly on an interest rate of 6 per cent costs $359,119 in interest over 20 years.
• The same loan paid off at $2067 a fortnight is gone six years earlier and costs $232,585 in interest - a whopping $120,000 less.
Personal insurances such as life insurance, trauma and income protection, should be reviewed every year to ensure the type and amount of cover you have remains relevant.
Financial Services Council chief executive Peter Neilson says what might have been right five or 10 years ago might not be appropriate now. "It's worth doing a review when your assets or liabilities change." That could be as simple as putting your details into an online comparison site to check the premium you are paying against those of competitors, or engaging an adviser to do a review.
Almost every insurer allows policyholders to increase life insurance cover without medical evidence in the cases of special events. These were usually restricted to events such as marriage and the birth of a child. Today they include buying a property, substantial increase in debt, increase in salary, civil union and a child starting tertiary education.
ASB's head of wealth advisory, Jonathan Beale, says not everyone needs life cover but it is worth considering other types of personal insurance. "If someone is going to be put in a financial position if you're not around, you need life cover to pay off all your debt as a minimum. If you're working, you need to ensure your income is protected if you're sick." Life cover pays out when you die. Income protection covers situations when you can't work in your normal job due to an illness or accident. Insurers cover a proportion of your income so you're not better off claiming on insurance than you are working.
In the case of an accident, income protection will top up your ACC cover if you earn more than the ACC limit and kicks in when ACC determines you can work but can't do your own job.
Trauma protection pays a one-off sum if you are diagnosed with illnesses such as cancer or suffer a heart attack. Total and permanent disability covers situations where you are permanently disabled and unable to work. It won't pay unless you can never go back to work.
Beale says people can make insurances more affordable by choosing a higher excess or longer wait periods before cover kicks in.
"If you self-insure a little bit, get some money in a savings account and use that rather than claim, you'll save on your premium."
Talk to an insurance adviser to help you get the right mix of cover for your circumstances.
You probably have a few of these in your wallet, and they can be a blessing or a curse, depending how you use them.
"Credit cards are great if you give them a damn good thrashing every month and make sure you pay them off the next month," says Boyle. "They're a great way to help with budgeting and you don't have to carry cash. But if you're just paying the monthly minimum, it won't put you in a good position." Credit card interest rates vary between 18-20 per cent a year, so it is more expensive to have credit card debt than it is to have a personal loan. Most banks require a minimum monthly payment of 3-5 per cent of the balance.
Depending when in a billing cycle you make a purchase, banks can give you 44-55 days interest-free. If you have credit card debt you're having trouble paying off, consider taking a balance transfer offer. Many banks offer deals such as 0 per cent interest for a certain period for balances transferred to their cards.
This can be a good way to get on top of a debt. David Boyle, group manager of investor education at the Commission for Financial Capability, says: "Zero per cent for six months wouldn't be a bad thing. But what is that going to do to after that? You'd have to reduce the debt before the interest rate kicks in." If you have a lot of credit card debt, 2015 could be the perfect time to cut them up and transfer the balance to a personal loan.
Effort pays off
If you are having trouble paying off your credit card balance, consider transferring it to get a cheaper rate. Most major banks are offering no interest or low interest for between 6 months and a year on transferred balances. ASB's Jonathan Beale says if you transfer banks, make sure you pay off the debt and don't just delay the inevitable. "Another option is to transfer it to a personal loan because it will have a lower rate."
It's a good idea if you can get a lower interest rate but the key is to make sure the term of the new loan isn't longer than the loans you've combined. A lower interest rate loan can still be more expensive than a high interest one if it takes longer to pay off.
That's why putting a small debt on to the mortgage isn't always a great idea.
"Putting money on a mortgage is probably pushing out the term so it looks cheaper on a monthly or fortnightly basis but actually you're paying an awful lot more interest than you'd pay on a shorter term," the ASB's Jonathan Beale says. "The quicker you pay off the debt, the better. It may be more painful on a monthly basis but if you're extending the term you're only extending the amount of interest you pay." He says it's vital that people who consolidate their debt don't feel they can then rack up more.
"The key to getting out of debt is to curtail impulse spending. Shop around. Think 'do I need this?' Discipline about spending will help with the amount of debt. But goals should always be realistic. Don't say 'I'm going to pay off my debt in a year'. Be sensible about it. Set a reasonable timeframe and stick to it." Pay off your highest-interest debts first, then work your way down. If you can, pay your bills from your salary when it arrives in your bank account, rather than waiting until the end of the pay period to transfer across what's left.
If you had $5,000 in credit card debt, being charged 18 per cent, $2,000 in personal loans being charged 9 per cent and $3,000 in hire purchases being charged 20 per cent, you'd eventually pay it off in seven years and 10 months if you were paying the accounts off individually at $100 a month each. Consolidating the debt into one 15.95 per cent loan could save $2,000 in interest and see the debt paid off within four years, for the same monthly payment.
Zenith Financial Group is growing and expanding! We are excited about launching our newest regional office located at 37 Ashley Street in Rangiora township, North Canterbury.
A lot of New Zealanders are sold their first insurance policy by their bank. It is good to have cover where none was before, and a big attraction for many of these clients was convenience: they usually filled in short forms and got cover without medical tests or exams.
But the trade-off is generally more limited cover and an opportunity to improve on it if they take the time to get good advice and submit to more extensive underwriting. Here are the main issues:
That list is just life cover. Income protection and Trauma policies yield even sharper differences, of course.
Research for life companies points to $650b deficit but others question data's accuracy.
The insurance industry says its research shows New Zealanders are under-insured to the tune of $650b. New Zealanders are under-insured by $650 billion, a two-year research project has found.And over the past five years, one in seven households has experienced a serious illness resulting in an inability to work for three months or more.But a shareholder advocate says the $650 billion figure seems excessive because most people do not need all types of insurance.
The project, commissioned by the Financial Services Council, which represents investment and life insurance companies, is the first of its kind in the country. Data compiled by ACNielsen was analysed by Massey University researchers.
A senior lecturer at the university's business school and the country's only insurance academic, Dr Michael Naylor, said the research found insurance cover was sporadic.
"People who were married with children who need insurance weren't covered, but then older people who don't really need it were."
Dr Naylor said insurance coverage was not as low as the industry expected - most people with children at least had life insurance. He believed this was because it usually came as a condition of getting a mortgage. The research found that each year the primary income earner in 14,980 households will fall seriously ill and be unable to work for six months or more - 288 households a week fall into the gap.
Only 20 per cent of households would cope for more than 12 months with paying their household expenses and maintaining their lifestyle if a serious illness meant the primary income earner being unable to work, the research said. However, 55 per cent of households would be unable to pay all their expenses and maintain their lifestyle within a month after sick leave and annual leave ran out.
Massey University's report said common reasons for not being insured were believing the Government would help, lack of trust in insurance companies and the difficulty people had facing up to the idea of death or permanent disability. Also, the prospective policyholder was being asked to pay money for an intangible and uncertain future benefit, when that money could be used in ways that could have clear immediate benefits. Bruce Sheppard, an accountant and shareholder advocate, said the only form of insurance that was essential was income protection.
People needed life insurance only if they had debt or dependants, fire and theft was "quite nice to have" while health insurance was mostly completely unnecessary. "The rich should be self-insuring, the poor can't afford it and that leaves the middle who should get income continuance until they can afford assets so they can self-insure. "So to me that $650 billion figure sounds grossly overstated."
Peter Neilson, chief executive of the Financial Services Council, said the research painted a picture of serious financial risk for people should an income earner die or have their income disrupted through illnesses such as cancer, heart attacks and strokes.
The research commissioned from ACNielsen involved 2000 respondents in an online survey.Massey University then quantified the extent of underinsurance and the national cost of underinsurance to the Government.
$351.8b permanent disability
$2.97b income protection (per month)
- estimates from Massey University