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Insurance: Luxury or necessity?

Thursday, July 23, 2009
Why insurance is important. Image: Getty
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By Allison Tait
MSN NZ Money writer

When times get tough, what's the first thing you drop from your budget?

Once you've knocked out the usual suspects, such as morning coffees, impulse magazine purchases, that third Doobie Brothers greatest hits CD, chances are you'll start looking at your insurance policies. "What are the chances?" you'll think. It's money for nothing, you might imagine.

Well, banish those thoughts. "There are two aspects to wealth creation: creating wealth and protecting it," says Moneymax's Liz Koh, a leading financial planner. "You have to do both."

What type of insurance you need depends very much on the stage of life you're at. "Young people, just starting out, need to look at insuring their assets such as cars and personal property," Liz says. "Young families need this as well, but they also need to emphasise premature death, income protection and possibly health insurance. If you're older, you may have no mortgage and no dependents, so your emphasis will be on health insurance."

According to Liz, income protection insurance and trauma cover (which provides a lump sum payment in the event of a critical illness) are the most overlooked types of insurance. But the recession may be changing that.

"We've found that the number of people considering redundancy cover has soared," says Conor Sligo, director of Inform, a website offering personal insurance advice and quotes. "This often prompts them to consider income protection for illness as well."

Conor says that Kiwis appear to be taking their insurance very seriously in the current financial climate. "We've noticed an increase in people wanting to take out cover, but we've also noticed they're wanting to streamline that cover to keep costs down. 'Bells and whistles' are not as popular." (See below for tips on keeping costs down.)

Women are driving the insurance purchases for families (or couples). "Kiwi men still have a large dose of 'she'll be right' attitude when it comes to insurance," Conor says. "We find that, by and large, women are more careful consumers and will shop around and compare a range of options."

Under-insurance is still a common problem, however. Underestimating the amount of insurance you need is not the best way to save money. Instead, consider these money-saving ideas from Inform:

1. Health insurance: Is yours a "major medical plan", or one that includes cover for GPs, prescriptions etc. "In NZ, these are almost always a waste of money if you look at the fine-print," Conor says. "The cost of the GP add-on will usually be about equal to the amount you can claim back!" He suggests considering an excess on your health insurance if you don't already have one.

2. Life insurance: Review your cover amount. If you've paid off part of the mortgage or the kids have left home, you may be able to reduce your cover, saving money.

3. Income protection: Review your waiting period (the amount of time you need to wait before claim payments will start). "Increasing your waiting period will lower the cost of your premium," Conor says. "But approach this with caution — a waiting period that is too long can cause real problems if a claim is needed."

Also, look at packaging your income protection insurance with other types of insurance (such as life insurance). "Insurers often have package discounts," Conor says.

For Liz Koh, there is one basic rule to remember with insurance. "It needs to be reviewed annually," she says. "Don't 'set and forget'. Needs change over time."

And if you think you can ignore it because you're young, think again. "Car insurance in particular is a real issue for young people," she says. "They feel it is expensive. But there are many examples of young people borrowing big sums for a car, not being able to afford to insure it, and then it gets stolen or wrecked. The loan repayments continue — and that's not a great start in life!"

User comments
One of the main concerns of most are the ever increasing premiums. Premiums that are affordable today may not be affordable in 5, 10,15 years. Taking Level Cover premium is one way of ensuring future increases in premiums are minimised but Level cover may not be affordable to start with. As an insurance broker, my advice to clients is to pass the ownership of your policy to your working children who can afford to keep the premiums going. After all, they are the ones who will benefit from their estate. Most clients see a lot of merit in this.