For many Kiwi families, recent events are making it financially tough. This general financial hardship is likely to get worse – probably over the next twelve months or so – before it gets better. So, people are looking to cut expenses. Some look at cancelling their life and other personal insurance policies, such as health insurance.
Like anything related to personal finances, your insurance coverage should reflect your current life situation – if your insurance policies aren’t up to date, your premium probably isn’t either. Sometimes cancelling some policies might make good financial sense, perhaps you’ve repaid all debts, have no dependants and have sufficient assets so you no longer need a life insurance policy.
No matter what may be driving you to consider making a change, a decision to cancel insurance should not be made without careful consideration, as switching or cancelling a personal insurance policy is nearly always irreversible.
Switching insurance companies might seem like a good idea to save a little money if you can find a cheaper quote, but it’s seldom a wise move, and really should usually only be an absolute last resort. If you are thinking about switching, there are some things you should consider:
1. If you cancel a personal insurance policy (including life, health, income protection, and so on) and want to buy a new one, you will have to go through the underwriting process again. Underwriting is the detailed process by which the insurance company assesses the risk you present to them, for these types of policies it involves a – possibly lengthy – investigation of all your medical records
2. You will be older than when you first took out the policy, and may have new health issues or conditions you did not have before, which will impact your premiums, and may come with exclusions, loadings (where the premium for the cover could be loaded by 50%, 100% or $150% if you have certain health issues) and stand-down periods (a time during which you cannot make a claim for certain things, usually measured in years!). In other words, you will likely pay more and be covered for less than with your previous insurer
Even if – for some reason – you do decide to change insurers, a good approach is to first get a quote from the new insurance company and go through the full underwriting process to determine what your new premiums and potential exclusions or loadings will be – as well as a detailed comparison between policies. Only if it’s in your overall best interest should you then decide to move. If this is the case, never cancel your old policy until the new one is fully established! This avoids the risk of ending up with no cover (or less cover) than you had before if something changes at the last moment, so it is a good idea to proceed with caution and talk to an insurance broker (‘financial adviser’) who can give you guidance on what to do.
Noting the drawbacks listed above, if the sole aim of the cancellation, cover reduction, (or switching insurers), is just to save money, take the time to explore other options.
Can savings be made elsewhere? Can income be bolstered?
The reason for asking these questions is because insurance is well-known as one of the areas wealthy people spend money on – even when finances are tight. That’s because wealthy people want the peace of mind that comes with knowing them and their families will be taken care of if something bad happens. Wealthy people know that the common mentalities of "she'll be right" or "it won’t happen to me" aren't enough to protect them (or you!) from unexpected events – which can cost hundreds of thousands of dollars. It doesn't matter whether it’s health-related, house-related, or life-related, it’s much cheaper to pay for insurance than pay for potential eventualities. The wealthy see the value of spending on insurance in the short-term to protect themselves in the long-term.
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If you’ve had personal insurance cover in place for years, or even decades, it can be difficult to give up the ‘security blanket’ of knowing you have it. Talking to an insurance adviser can help you feel more confident that you are making the right decision before any cancellation or reduction.
Because insurers can’t advise independently, talking to a life insurance adviser (such as one of Become Wealth’s advisers, commonly called “insurance brokers”) can help as you'll be able to explain your changing needs. Insurance brokers are experienced in understanding all the implications of changing or cancelling a life insurance policy and can provide the help and guidance you need to make good choices.
As mentioned earlier, when you take out a personal insurance policy, your lifestyle and medical history are examined through an underwriting process.
That means cancelling your insurance can be a big decision because if you need to take out cover again in future and you’ve had any medical issues, that will impact how much cover you can get, what might be excluded, and how much it costs.
It’s best to understand any consequences of cancelling your insurance before you do so. An insurance adviser will be able to talk through your circumstances and medical history and give you information on how cancelling your insurance might affect you in future.
Your life insurance policy should be part of an overall financial strategy for you and your loved ones, and of course, you need to ensure it's appropriate and affordable. For this reason, any adjustments need careful planning.
Retirement, paying down debt, a relationship split, or kids leaving home can all be good reasons to review your life insurances, and you may decide you no longer need the cover.
It’s a good idea to have a conversation with an insurance adviser about any plans you have, so they can help you assess your current and potential future needs.
For example, if you’ve paid off your mortgage you might want to cancel your life insurance cover. But if you then decide to buy a holiday home, you might have been better off keeping your existing cover in place.
Bouncing your plans off an adviser can help you feel confident that whatever decision you’re making is the right one now and in the foreseeable future. Certainly, if you are in one of the following situations then cancelling insurance might make sense:
Insurance is complicated. Lengthy policy documents, fine print, jargon, and a sometimes-bewildering array of forms can be overwhelming.
Depending on the insurance company your policy was purchased from and the type of policy you bought, you may not be able to even make changes to an existing policy.
A professional can help you unpack all this information.
One of the common reasons people give when cancelling insurance is that they can’t afford the premiums.
But sometimes there are other options to reduce the cost, including reducing your cover, increasing wait times, or restructuring your policies.
If you need help affording your cover, it’s always a good idea to talk to a financial adviser before cancelling – they can explain all your options so that you can make an informed decision about whether cancelling your cover is the best choice for you.
Cancelling a personal insurance policy can be a big – and sometimes exciting! – decision in your life, but whatever your circumstances, it’s always great to get help tailored to suit you.
If you've got a long-standing policy, deciding precisely what you want to adjust (and the reasons for making the change) is essential. If you rush into a new policy to save a few bucks, there may be hidden costs, unintended consequences, or exclusions you're not aware of.
Life is dynamic, and it's perfectly normal for you to want to make changes to your insurances from time to time. However, personal insurance is not something to make a quick decision about. Take your time and make a wise decision.