Insurance, necessary evil right or essential financial safety net?

Insurance, necessary evil right or essential financial safety net?

 

Insurance is one of those things people do not like paying for and often bundle it in with power, interest, rates, tax and bank fees. Something to address when we really have to until then, we will ignore it and just pay the bill.

Insurance is about covering a loss, well a potential loss. Because you need to take insurance before you have the loss in order for it to work. People comment ‘but it should cover X, because I know about X and that is what I want cover for’. If you know about X then the insurance company is unlikely to bet on X because it is likely to be a sure loss for them.

A recent insurance forum discussion on the subject; why people stay with their current insurance carrier, suggests that the reason is mostly apathy. There is not enough wrong (premium, product, relationship) to trigger people to review and change it.

Sounds like a potentially dangerous place to find yourself, if you have a claim and you find yourself without the cover you really need because you did not keep it up to date.

What most people do not appreciate is life insurance companies plan to pay claims. It would be short sighted of them not to, as they are in the business of selling contracts that pay money in defined contracted situations. You will find, if you take the time to find out, life insurance companies in New Zealand pay all of their valid claims and most insurers pay some of the ones that they do not have to. That is not to say there are not difficult ones either, because they can be for a number of reasons.

While on the subject of claims, a couple of things in the last year or so support this.

One insurer paid a medical claim for a client that is technically cosmetic, so not normally covered. It might have cost them $12-15,000 but given the circumstances if this was not done then it would have cost the insurer $4-5,000 per month for the next 20 years because the client's situation would have prevented the policy holder from going to work. Smart business for the insurance company, great personal outcome for the client.

Another situation was where a policyholder was technically excluded for their initial symptoms due to standard policy stand down clauses, the intention of the clauses was not to catch this particular situation, and the insurance company paid their claim. 

Yes, insurance companies can take their sweet time paying a claim. This is usually because they want all of the information relating to the claim together, before making a final decision. To be fair, if you were paying someone several hundred thousand dollars, you would too, You would want to make sure you had it right.

The question is, is it a necessary evil?

It depends on your point of view, and often more the point, what stage of life you are at?

The difficult reality is when it comes to a comprehensive insurance cover plan, if you cannot afford all of it you probably need it and if you can afford it you probably do not. For those who need it, it becomes a juggling act as to what and how much cover you take, because nothing is not really an option. Some cover is better than no cover.

If you are in the position of starting out on something and you do not have the financial resources to cover a loss, like someone becoming terminally ill or being disabled, then you need some form of insurance to transfer the financial risk.

Take a young couple buying their first house with a mortgage. The 30-year obligation to pay for the house is an excellent example, where there is a need for death and disability cover to transfer the financial risk. Ok you might say, if the wheels fall off, sell the house, pay the mortgage and problem solved. That may well be their plan to start with, but what about if they buy the house and then have kids? Things have a way of changing, often quite quickly. Now we have kids involved it is not so easy for the surviving partner to carry on with life, and they still need somewhere to live.

This example is an ideal one for insurance because it is about those around you or left behind. Some quite strong emotional reasons to make sure things are taken care of financially, and this is often where the necessary evil comments come from.

The obliged feeling you get when paying insurance premiums. Feels like a waste of money, as there is no direct return on your investment. Added to that, something really bad has to happen to you for it to have a return. I admit not a pleasant thought, though the thought of your family being under financial hardship is not one you like either, that is why you took the cover in the first place.

To help you with the return question, a recent statistic I have seen; The chance of death before the age of 65, 11% as an individual, 16% if you are a couple and 30% if you are a business partnership of 4.

The statistics for a critical illness before age 65 are about double for an individual and just under 30% for a couple and just over 45% for 4 business partners. Makes for some sobering reading, why do you have cover? These things actually do happen.

Let us just stop and think about those around you, realistically can you name five people who have had something bad happen to them?

I can, and quite easily. A classmate at school lost his sight playing with fire works, a parent died with cancer, friend died in a motorcycle accident, work colleague died of cancer, another has had breast cancer and another friend has cancer. All of these were before age 65 and that is just the surface you know about, often you do not know until after the fact and this is not talking about any of my clients either.

So you are single and do not need insurance, right?

Not so much. Life insurance possibly is not needed, but the real risk you face is something happening and you are still here. Being able to work and earn an income is important, so is having somewhere to live. Yes having no life insurance is probably realistic, but not having critical illness care, income protection and medical insurance is not.

Is it a necessary evil? No not so much. It is a valuable financial resource when you have the right cover at the right levels, it can be a waste of money if you do not get it right.

Get in touch with us at Willowgrove, we specialise in setting you on the right path with your risk management.

The information is only intended to be of a general nature and should not be relied upon in any part without obtaining full details of the products and services by contacting Willowgrove Consulting Limited. All product and service details, terms, conditions and other information are subject to change at anytime without notice. Terms, conditions and fees apply to the various products and services and are available on request. A disclosure document will be provided to you on request free of charge.

Jon-Paul Hale

Written by : Jon-Paul Hale

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