Dinkies (Dual Income No Kids) and Life insurance

Question:  We are a young couple with no children.  What life insurance should we have?

This is an interesting question and, in truth, there is more than one right answer.  It depends on a number of factors:

Do you plan to have children?

If so, then as soon as you start trying to conceive, you should consider the financial position of each partner in the event of the death of the other.  Then, you should decide whether you want to create a lump of cash on a death and are prepared to pay a small insurance premium each month to do it.  

The obvious question is:  Could the survivor earn enough money each week or month to support herself/himself and a baby?  If not, then life insurance is an obvious solution.  You should find a competent life insurance adviser whom you can trust and take advice about how much, and which insurer to use.

Do you have any debts?

If so, could you each meet the repayment obligations if the other died and the survivor was liable for the debt (mortgage, credit card, student loan, etc).  If not, then you should consult a professional life insurance adviser to arrange appropriate insurance.

Could you each support yourself financially?

If so, the death of one would not leave the other in trouble financially then there is no demonstrable need for life insurance

Are there any there any other factors that could mean that there is a need for extra cash in the event of an untimely death?

One possible need here is the cost of repatriation of a body - if you live or frequently travel abroad.  

Another possible situation is if you want to make a financial provision for a family member (e.g. aged parents, disabled sibling, etc), friend or charity.  Each of these creates a situation where appropriate life insurance would be a good solution.

So in summary, unless you plan for children or there exists a real need for cash or a desire to provide for another person or charity, it is hard to justify life insurance.

You should note that this discussion has focused on life insurance only.  It has not considered disability income insurance or lump sum insurance payable on total and permanent disablement or the diagnosis of a serious medical condition.  These are subjects that will be addressed in a later blog.

The Single Person and Life Insurance

As a life insurance adviser for many years, the question of Life Insurance for the single person has come up many times.  If we accept that Life Insurance is a product that creates a lump sum (or less frequently, a stream of income) on the death of a life insured, the single person with no dependents can rightly ask the question: "Why would/should I bother with life insurance?"

A frequent event that triggers the question is the single person buying a home, and being told by the bank or other lender, that they need life insurance.

A recent client engagement provides an interesting case study.  Jaimie (not her real name) is a 42 year old professional lady earning a good salary - $74,000 per year.  She travels overseas in her work, occasionally to third world countries.  She has aged parents who are not wealthy.  She lives well and to date has not purchased a home, but plans to do so within one year.  She has savings for the deposit on her apartment and a small credit card debt incurred for a recent holiday.

Her bank had told her that they would lend to her to fund her purchase of an apartment and would require that she buy life insurance and indicated that she should buy it from the bank.

As her savings amounted to 20% of the purchase price of the apartment, we advised her that there was really no logical reason to buy life insurance.  The reason one buys life insurance when taking a mortgage is to ensure that dependents do not lose their home if an income-earner dies!  In Jaimie's case, there are no dependents.  

If she had little or no deposit, then it would be reasonable to have some life insurance  to cover possible shrinkage in value if there was a property downturn.  At most though, 20% - 25% of the mortgage!

Far more important, I suggest, is the need for disablement insurance.  If for example, Jaimie had an illness and couldn't work, then insurance to replace her income would be vital.  A combination of income protection insurance and total and permanent disablement insurance makes a lot of sense.

A footnote to Jaimie's story:  As her work took her to dodgy places where the risk of accidental death was significantly greater than here in New Zealand, Jaimie was keen to have a small life insurance cover, $50,000 to cover the cost of repatriation of her body to protect her parents from such cost.

The Value that an Adviser Adds

How often do you hear or read the words "No salesman will call"?  The inference is that a salesman is a bad guy who will con you into  something that you don't want.  

Well interestingly, when it comes to life and health insurance, the so called consumer advocates would have you believe that the broker or adviser (salesman), who is paid by a brokerage or commission if he/she arranges life and/or health insurance for you, causes the cost of that insurance (called the premium)  to be more expensive than it need be.

On careful investigation however, we find that life and health insurance arranged directly with an insurer, i.e. responding to advertising, internet, etc, is no cheaper than the equivalent insurance arranged by the broker/adviser.  

The simple fact is that people don't generally approach insurance companies to get life and health insurance!  Sure, it happens occasionally, but not in sufficient volume to make an insurance company viable.  Sadly, human nature means that it is difficult to contemplate one's own death, or to contemplate the world without you!   So, as it is no less expensive, i.e. it costs you no more, to arrange your insurances through a broker, you get his or her services at no extra cost, it makes sense to use the skills and experience of a broker or adviser.  (This sentence to go into previous para)

This means that for the great majority of us, we need someone to point out the financial implications of an untimely death, illness or injury, and then to quantify them, and to offer appropriate insurance solutions.  That someone is your life and health insurance broker, or financial adviser.  

Sure, you can buy insurance over the phone or the internet, but, when it gets to claim time, and the insurance company declines the claim, for whatever reason, who is going to go to bat for you?  This is the time when the broker/adviser becomes invaluable.

To illustrate the value the broker adds, let me relate a true story with names changed to preserve the privacy of our client.  Mike is a successful business owner.  Against his wife Steph's wishes, he asked us to arrange Disability Income Protection insurance for him.  

Some eight years later, after a stroke induced by a chaffing of a seatbelt on his neck, Mike had cause to claim on his Income Protection insurance.  The claim went well for about two years and he was making exciting steps in his recovery.  Mike's policy provided that he had to prove his loss of income as a result of his injury/illness, and as he is a business owner, that loss couldn't be proven until after the company's annual accounts were prepared.  ACC had accepted the claim, so the client had regular income from ACC and the insurer during the year, and then the top-up at year end received a top-up based on the company's financial performance (profit).

The calculation of this top-up, whilst not complicated, was mis-interpreted by the claims office at the insurance company when they paid him the top-up.  We saw the calculations in their letter and recognising that there was an error, approached the insurer.  They asked that we make our submission in writing, which we did.

Two days later, they agreed that their reading of the policy wording was wrong, and they credited his bank account with the shortfall of $63,000.

This is not an unusual story - we have many on our files.  The calculations for income protection claims can be complicated, and we have found that, with no intent to short pay, the insurer has, on many occasions, inadvertently short paid.  Our experience and systems we have set up to check the calculations, have meant the difference of hundreds, and occasionally thousands of dollars for our clients.

These experiences illustrate the value that a professional life and health insurance broker or financial adviser adds!

Southern Cross Affiliated Providers System

Southern Cross Affiliated Providers System

We should be aware that, unlike most life and income protection insurances, most (but not all) medical insurance policies allow the insurer to change the terms and conditions.

Southern Cross Medical Insurance has just made some interesting changes to the terms of their policies.  The major change is that many procedures, including Angiograms, Angioplasty, CT Scans and MRI Scans, among many others, will only be covered if they are performed by one of Southern Cross' Affiliated Providers.

This means that the customer does not have a free choice about the medical professional that he/she wants to provide the necessary service.

I think that Southern Cross will argue that they have negotiated fees with these Affiliated Providers that reduce their cost of claims,and this is reflected in reduced premiums for the customers.  This is indeed possible, and if true, will be to the benefit of all Southern Cross customers.

It is a pity though, that some customers who need to use their policy, may not be able to choose their medical professional!

ACC Anomaly

ACC Anomaly

I recently realised that I had been labouring under a misunderstanding about the level of compensation provided by ACC.

ACC provides compensation for loss of income due to accident - and, if you are totally disabled,  unable to work and earning nothing, ACC pays 80% of your pre-disability income up to the statutory maximum - currently approximately $92,000.

If however, you are partially disabled - i.e. able to work and earn but less than you earned prior to becoming disabled, then the benefit is 100% of your loss of income.  The wording means that, in the extreme case, if partially disabled and only able to earn 5% of your pre-disability income, then ACC would pay you 95%!

All of this presupposes that you are able to get through the masses of hurdles that ACC puts in your way when making a claim!

Doesn't seem right somehow!

Kiwibank Can Cancel Your Policy

I was reading the Kiwibank Home Loan Policy yesterday preparing our rating of Mortgage Insurance policies when I found this:

"Kiwi Insurance reserves the right to vary its premium rates for the Policy and/or the terms and conditions applying to any sections of the cover provided.

Kiwi Insurance also reserves the right to cancel the Policy.

Any variation to, or cancellation of, the Policy, will apply to all Kiwi Insurance customers who have Home Loan Insurance and not only to you individually. If we take this action we will give you at least 30 days written notice to the last known address we have for you."

What this means is that if, for any reason they like, Kiwibank could amend or cancel all of its policies with you having no right of redress.  This wouldn't matter except for the poor souls who have been diagnosed with a serious medical condition since taking the policy, and who would then be unlikely to get insurance elsewhere.

This right to amend or cancel exists in fire and general (property) insurances, but not generally in life, trauma, income protection or disablement policies!  This appears to be the only one in the market with such an oppressive provision.

Funeral Insurance - Unexpected Consequences

I have just read a very interesting piece in the Insurance and Savings Ombudsman's (ISO) newsletter to participants in the scheme.  (The ISO provides an external complaints resolution service to insurance companies, insurance brokers and financial advisers).

In this case, the complainant had purchased a "Funeral Plan" of the type advertised on TV and generally featuring a celebrity whose mana is used to give the plan some credibility.

It seems that what is not disclosed is the rate at which premiums increase as the insured person gets older.  The brochure provided to the complainant showed premiums that would be payable up to age 75, but not beyond.  It transpires that premiums increase steeply after age 75, to the point that the complainant found it impossible to continue to pay.  Further, it is entirely possible that the premiums paid would have exceeded the benefit payable on death - a fact never communicated to the complainant.

The ISO found that the insurer "had a duty to specifically ensure that its insureds were made aware the premiums for the policy continued until the age of 90, increased quite substantially past the age of 75 (the oldest age noted on the brochure) and would probably exceed the insured benefit."  They also "did not believe the policy was marketed fairly and, consequently, on a fair and reasonable basis, asked the insurer to refund the total premiums the complainant had paid."

The insurer offered to hold the policy at its current level (i.e. no future CPI increases in cover) and to waive all future premiums.  The complainant accepted this offer and the case was settled.

We consider that this was an excellent decision and outcome for the complainant.  The marketing used to sell this type of insurance, i.e. TV featuring celebrities, can be deceiving and this is a classic case!

It is interesting to note that this type of insurance is not offered by life and health insurance brokers or financial advisers - it is only sold directly by the insurer, and usually promoted by TV and other direct advertising media.  The brokers and advisers that I know, would never have any part of such policies!

Note:  The ISO decisions are published on their website, but this one is so new that it isn't up yet.  I will include a link when it is published.

Exclusions in Life Insurance Policies

I often get asked about exclusions - i.e. what don't they pay on.

In the Life Insurance cover world, the common expectation is that suicide is excluded - and that is partly true.  Mainstream Life Insurance companies generally exclude suicide in the first 13 months of the policy - thereafter they will pay a claim for suicide.  The reasoning being that if you're intent on ending your own life, you're unlikely to wait 13 months.

The other condition that could cause the insurer to deny a claim is if you haven't been 100% truthful when completing the application form.  If you don't tell the whole truth, the insurer may be within its rights to deny the claim.  There are some complex rules around this that are beyond the scope of this blog.

For most mainstream life insurers, (i.e. those for which life insurance is their main business), these are the only exclusions contained in their policies, however, for insurers owned by banks, there is often another exclusion that could be disastrous. They often contain an exclusion along these lines:

"No benefit will be paid if the death is caused by war, invasion, act of foreign enemy, hostilities (whether war is declared on not), civil war, military or usurped power, rebellion, revolution, insurrection riot or civil commotion."

Now that doesn't seem too bad, but consider these possibilities:

*   In 1999, a lady was tragically killed on a picket line on the wharf at Lyttelton wharf.  Could a strike/picket line be called a "civil commotion"?

*   Last year, my brother went to Western Samoa for a holiday, to find roads blocked as there was a problem ahead with locals indiscriminately using firearms.  If he'd been accidentally shot, could his death be said to have been "caused by rebellion, revolution, insurrection riot or civil commotion."

*   If you had been visiting Fiji at the time of any one of the coups d'etat, and inadvertently been shot to death,  I suggest that you certainly would not be covered by many of the bank life insurance policies.

*   In 1981, during the protests at the Springbok tour, there were many ugly situations that could have resulted in a death.  These could easily have been labelled as a riot or civil commotion, and the bank insurer would have denied any resulting death claim.

So, I guess that the message is:  when buying life insurance (and any other insurance), make sure that the small print doesn't contain any nasties such as these.  It's too late to find out at claim time.

Dirty Tricks in Bank Income Protection Insurance

I have just heard a horror story about a bank/insurer and their Income Protection insurance.  Customer has a policy that pays a benefit if he is temporarily totally unable to work.  He had an accident and was off work.  The bank/insurer started paying the claim.\

Unfortunately, while disabled, he fell and damaged another limb (shoulder) and was told by the doctor that he shouldn't work as a result of this accident.

Bank/insurer stops paying him after the first injury is recovered and refuses to pay for the second claim, even though he can't work.  They claim that he was not covered for the second injury because he wasn't working when the injury occurred.

Nonsense!  There is nothing in the policy wording - I have checked it carefully - that would allow the bank/insurer to decline the second claim!  I think that it is just an over-zealous clerk reading more into the words of the policy than are there.

My advice:  Get a Letter of Deadlock from the bank/insurer and refer the matter to the Insurance and Savings Ombudsman

INCOME  PROTECTION  INSURANCE  TRAPS

Income Protection Insurance is an interesting financial tool, but of all life and health insurance products, it is the most misunderstood by customers and insurance industry people alike.  Here are 11 traps for the unwary:

1. Make sure that you have a guaranteed right to renew the policy until age 65, or (in some cases) 70!  Do not accept a policy that the insurer can cancel for any reason – there are a few of these out there.  The last thing that you need is to have your first heart attack the day after the insurer cancelled your policy.
2. Look out for the Benefit Period – i.e. how long they will pay you if you have a long-term disablement.  We sometimes see policies with 2-year and 5-year benefit periods.  These are unacceptable – we only ever recommend Benefit Periods to age 65.  If you’re sick long-term, you don’t need the insurer saying ’Sayonara’ after 2 or 5 years!  There is an argument counter to our long-held view.  That alternative is based on the fact that the majority of claims on Income Protection insurance lasts for less than 5 years.  Then given that the premiums for this type of cover become expensive with age, you might consider a 5 year benefit period and take the risk on the longer-term claim. There is more than one right answer!
3. Do not accept a policy that does not have a benefit payable if you are Partially Disabled!  A recent study of Income Protection claims showed that over 70% of claims go from Totally Disabled to Partially Disabled before, in most cases, full recovery.  Don’t get caught out in the cold with a “no partial disability claim” policy.  One policy advertised on TV does not pay a claim if you are Partially Disabled!!!
4. Watch for a 2 year limitation on Partial Disability claims.  This is almost as bad as no Partial Disability claim – I have two clients now who have been on Partial Disability claim for over 2 years – in one case, almost 10 years!
5. Do not accept a 2 year limitation on Mental Health ( read Stress and Depression ) claims.  Anecdotal evidence shows that the greatest single cause of IP claims is stress and depression.  Why would you have Income Protection that limits benefits for the largest cause of claims?
6. Beware the policy that says that the Partial Disability claim ceases if you are able to work "full time".  Many claims for partial disability involve conditions that reduce your productivity, but not the hours you can work.  For example, we have one professional client who prior to his breakdown, worked 60 hours per week.  On medical advice, he now works 40 hours per week and at a less frenetic pace than previously.  He is earning about one half of his pre-disability income. If he had the bad policy, he would be out in the cold.  He has a good policy that recognizes reduced productivity as a Partial Disability and has been on claim for many years.
7. Watch out too, for the policy that allows the insurer to deem that you are earning if you are medically able to work but are unable to earn.  For example, you can’t hold down the responsibility of partner or business owner, but medically you are able to work as a clerk.  But, you can’t find a job – after all, who wants to hire someone who had a nervous breakdown 18 months ago and has lost his/her business?  The bad policy can deem that you are earning what they say you are capable of earning, and will offset that amount against any benefit you expect.
8. Be careful of “group” policies that are cheaper than “retail” – they often have restrictive clauses.  One that we see and don’t like provides that a Partial Disability benefit is only payable if you are working for the original employer!  So, if your illness means that you can’t work as an accountant, but can as a gardener, you are out in the cold!  Discounts usually mean reduced benefits!
9. Watch for restricted cover policies.  Some insurers offer policies that only pay benefits if you suffer a major trauma type illness/injury.  These do not cover stress and depression, but are cheaper and some salespeople find them easy to sell.  We will not use them.
10. Agreed Value policies do not automatically pay out the “Agreed Value” if you are disabled.  Most Income Protection policies offset any on-going income you receive or are entitled to receive for the “Agreed Value”.  It is logical that they do, but many salespeople are unaware of this, or overlook it.  There are several insurers that claim that they do not offset post-disability income.
11. The tax treatment of Agreed Value policies is still an area of concern.  Three insurers believe that any benefit will be taxable as income and accordingly the premium is deductible.  These insurers will allow you to cover up to 75% of income.  Four other insurers believe that the benefit is not taxable and the premium non-deductible.  These insurers will only allow you to cover 55% of income.  IRD has a working party considering the issue and we await their decision.  The risk is if you have the 55% cover and IRD rule that they are taxable/deductible and you have become uninsurable.  You now only have cover of 55% of income and it is taxable!   Our preference is for the taxable/deductible route.

In summary, there are excellent polices, offered by quality insurance companies with none of these traps, so you don’t need to settle for second best.

Graeme Lindsay