Tackling under-insurance

Several insurance companies, the Retirement Commissioner and a newspaper, have recently commissioned surveys and studies on how much insurance we Kiwis hold, how much we pay for it and how financially knowledgeable we are. New Zealanders are chronically under-insured, representing both an opportunity and a challenge for advisers.

According to AMP’s study, 67% of families have either no life insurance cover or too little cover. The study, which surveyed 470 families with dependent children, found that only 55% have life insurance and only 31% have cover equivalent to five times the average wage (these people aren't planning on being dead for long!).

AIA's survey of 540 New Zealanders summarised that Kiwis are generally underinsured, with almost half of us having no life, medical, income protection or trauma/illness insurance at all. (It's hard to understand why, when the number of people on invalids or sickness benefits is increasing by the day.)

For the record, it is official - people are still dying or getting serious illnesses. In 2005, life insurers paid out $370 million in death claims, $170 million in other payout benefits and $202 million in maturities.

The Sunday Star Times undertook a survey on the cost of premiums and journalist Rob Stock concluded that "...despite cutting out the middleman's commission by selling online and by phone, directly sold term life insurance policies are generally more expensive than policies sold through advisers..." For the record, the article indicated additional premiums by going "direct" of 20% and 23% for males aged 35 and 45, and for females aged 35 and 45 additional premiums of 4% and 17%. The moral is, use an adviser!

The Retirement Commissioner's survey, funded by the ANZ, found the main sources of superannuation or insurance advice are insurance company agents or advisers or independent financial planners. Eighty-five percent of respondents found the superannuation advice obtained from the insurance agents or advisers "very useful" or "quite useful". Ninety-four percent found the advice from an independent financial planner to be "very useful" or "quite useful".

Some other findings from the Retirement Commissioner's survey:

• Overall, Kiwis have a reasonable level of personal financial knowledge;

• There was strong correlation between financial knowledge and socio-economic status (but not always!);

• There was some confusion over NZ Superannuation. A lot think it is income and/or asset tested (which it isn't);

• There is mixed understanding of investment strategies, particularly relating to (the superior) long-term returns form the share market;

• Some people think it is OK to divulge their internet banking password to bank staff;

• Nearly half (49%) would give dodgy investments a go; and,

• The understanding of (the magic of) compound interest is relatively weak.

And finally a couple of personal insurance-related observances...

First, in my 29 years' experience, very rarely after doing a capital needs analysis with a client do I find anyone under 60 who is over-insured. Second, I would love to commission my own survey to test a theory which I have developed by observation and anecdotal evidence over almost three decades - namely that young and middle-aged people who have lots of life insurance tend to stay married or together. Those who don't "believe in it" or have the absolute minimum, and who have spouses, partners and dependents, seem to be the clients who are more inclined to divorce. People buy life insurance because they are obligated to someone or because they love someone. It's an interesting theory, which I remind my staff about often. They're starting to believe me!

Chris MacKay is Managing Director of Chris Mackay Financial Planning in Lower Hutt.