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!