While it’s widely accepted that most New Zealanders are under-insured, recently our advisers here at Milestone Direct have been seeing people who are over-insured. Being over-insured basically means you are wasting money on insurance.
After a mortgage, personal insurances such as life insurance are one of the most important personal financial decisions you can make in life. Too much insurance, or insurance that doesn't match your needs, could cost you thousands in unnecessary premiums (the fees to keep your cover in place). The five points below will help you determine whether or not you could be over-insured. While these points relate to personal insurances such as life, income protection, and health insurance, they can apply to other types of insurance too.
1. Changes in your stage of life
People move through different stages of life constantly. To match this, your personal insurance policies should move accordingly. This is because you require different levels and types of protection at different stages.
If you have adult children and you have a nest egg, then it's quite possible you don't need life insurance. Depending on your individual circumstances, you may not need trauma insurance, or income protection insurance. Or, you might need insurance, but not require as high a level of cover as you did 10 or 15 years ago when the policies were originally put in place.
You could be paying expensive premiums for insurance that you don't really need. Those premiums could be going towards a more enjoyable retirement, or are funds that you could be enjoying in other ways.
Consider this example: one of our advisers recently saw a couple who had established robust insurance cover when they were paying off a mortgage and had kids living at home. However, that was many years ago – since then, not only had they repaid their mortgage, they no longer had dependent children living at home. The couple both also have stable and longstanding careers with the same employer. Despite shifting into a different life stage, they still had the same level of insurance cover as when their personal circumstances were significantly different – and therefore as they had aged, the premiums between them were now over $400 per month. This was for well over a million dollars’ worth of life insurance they didn’t need!
As we go through different life stages, our protection needs to evolve too. The best way to ensure your insurance cover matches changes in your stage of life is with annual reviews of your existing cover.
2. Your insurance coverage overlaps
An insurance overlap can happen in many cases, with one of the most common overlaps we see being when people have more than one income protection policy. Generally, this will mean that only the value of one income protection policy will be paid out. This concept is explained in a lot more detail on this in-depth page about income protection insurance.
Coverage overlap can also occur if you have multiple health insurance policies, such as where you hold one personal health insurance policy, and another under an employee health insurance plan. Having both policies only makes sense when one of them has low coverage (lower than you need) – having a second plan will be able to cover the differences in claims if the need arises. However, if the medical policy provided by your employer is sufficient, holding another policy means you will be adding additional cost to your finances with little to no benefit. One option that may be suitable in the case of health insurance overlap is to lower your personal coverage to a reduced premium rather than cancelling it, as you may eventually move into a role with different employee benefits.
3. When your coverage is too high
Insurance is something that you pay for just in case the worst happens – whether it be an illness or an accident.
As we can never foresee unfortunate events happening to us, insurance companies make calculations based on your individual circumstances to assess your risk – this is a process called underwriting. For example, if you are a smoker, you will be classed as a high-risk individual and therefore pay higher premiums – because the chances of you claiming are naturally increased. The same is also the case if you have family history of hereditary illnesses, are working a high-risk job, or if you frequently drink alcohol.
While it really pays to be safe than sorry for things like these, you’re better off tweaking your coverage so that it’s balanced between providing adequate protection and being suitable for your financial situation – rather than paying a high premium that you can’t afford, for a level of cover you don’t need.
It could be well worth taking a good look at your coverage to see if you can lower your premiums or even get better options in the long run, especially if your situation has changed (e.g. since establishing your insurance you have left a high-risk occupation or stopped smoking or drinking). In the end, insurance isn’t just about the coverage – it’s also about utilising it to your advantage without breaking the bank.
4. Complex policies
Insurance policies are complex legal documents. Particularly in the case of policies such as income protection insurance, health insurance, and trauma insurance, careful analysis is required to understand what is and isn’t covered. Unfortunately, most individuals do not understand the terms and features explained at length by insurance providers – usually in pages upon pages of fine print full of legal and health jargon. Perhaps most important to identify among the fine print are the exclusions, or what will not be covered by each policy. Some policies even expire, so regardless of you diligently paying premiums for years, you still risk your cover being cancelled. If you’ve purchased something you don’t understand, you will have a higher chance of being either over or under-insured.
5. Unnecessary insurances
Many people have a range of minor insurances that they don’t need, with a prime example of this being funeral insurance. There’s no doubt that paying for a funeral can be a financial hardship and in select circumstances, having a funeral plan can make a lot of sense. For example, funeral cover can be very handy when a person has no savings and they are in a poor health condition. Some providers funeral cover has guaranteed acceptance – no medical, occupational, hazardous pastime, or financial underwriting is done. However, for most people, funeral cover simply does not make sense. This is because many people with funeral insurance eventually pay far more than the cost of the funeral in premiums, and that’s exactly what insurance companies are banking on in order to make a profit. A Consumer NZ study completed in 2016 sampled funeral insurance policies available to 64-year olds for $10,000 worth of funeral cover. Consumer NZ found that if the policy holders then lived a further 20 years, some would have paid more than double the cost in premiums than their family would ever receive as a benefit. Funerals are a known cost which we will all need one day, so we can plan and cater for accordingly. Most funeral insurance is also not really any different from life insurance, except the cover is usually for a much lower amount. A good life insurance policy will still pay out a sum to cover the funeral anyway.
Another example of unnecessary insurance is credit card insurance. Credit card insurance is usually offered as an additional service by credit card issuers (which are usually banks). Unless you work in a very risky occupation and therefore risk death, or disability resulting in unemployment and an inability to pay off your credit card, getting credit card insurance itself is over-insuring – no matter the amount. This is because selling credit card insurance to a credit card holder is another way for the issuer to make money. Most consumers do not require credit card insurance because even if you become unemployed, you should have some savings that can cover the minimum amount – and then an income protection policy that will replace your lost income if you cannot return to work in a short time-frame, therefore enabling to you to meet your repayment obligations.
As with any policy, ensure you carefully consider your circumstances before deciding on getting or cancelling credit card or funeral insurance.
Are you under-insured?
If you have a family who depend on you, or a large mortgage to pay, you may be under, rather than over-insured. You can either learn more about different types of insurance, or for a free and no obligation initial chat about this with one of our advisers, please contact us.
Note: Think carefully before cancelling any policies.
You need to be very careful when making the decision that you're over-insured and need to cancel or reduce your level of cover. If you've had the policy for several years, it's likely you won't be able to get insurance on the same terms again – this makes it a really good idea to speak with a professional.
Unfortunately, for many insurance advisers (often commonly called insurance brokers), there is a financial disincentive to advise on this basis. Most insurance advisers are paid commission based on what they sell, with volume bonuses on top. Because of the way these commissions work, it’s likely that if you already have an insurance adviser they’re still receiving trail commission (basically still being paid) for any policies you established through them – no matter how long ago. The amount of commission they receive is linked to the amount of premiums you pay. If they recommend that you reduce your level of cover, or that you cancel it, they will suffer financially from giving this advice. Incidentally, this is why Milestone Direct don’t pay any of our advisers or any of our staff commission or volume-tied bonuses of any kind.
Recommending you cancel or reduce your current level of insurance cover is also risky for the insurance adviser. Very rarely will someone lodge a complaint or take legal action against an adviser because they had too much insurance. Even more rarely will this complaint be successful. If, on the other hand, an adviser recommends a reduction in your level of cover, and then you experience an event that would have been previously covered, there is a very real risk that they will complain. This sort of advice is risky and as there's also a financial disincentive for providing it, it's no wonder many people are over-insured.
The bottom line
For younger readers, it might be harder to identify how much insurance you currently need. Our usual answer is to keep it simple and get in touch for a free and no obligation initial chat. At the end of the day, most policies are cheap or expensive for a reason – examine their features and assess your situation so you can make the best decisions with confidence.
For a review of your insurance needs with one of our insurance advisers, or for a free and no obligation initial consultation, simply get in touch.