disability insurance | Bolster Risk Management - Simplifying financial risk, insurance and investments for you.

Income Protection Made Easy

Dom Bish — Wed, 23 Mar 2022 04:31:10 +0000

https://bolsterriskmanagement.com/

Income Protection Made Easy

I was going to call this article “IP for Dummies”, but figured there might be some trademark issues. It is not something we often think about, but what would you do if you became sick and were unable to work? You may have heard about Income Protection (or ‘IP’) already. You may know that if you are sick and cannot work, this insurance will pay you out each month. This sounds great, but you may have also heard that it is too expensive, not worth it, or is just too boring and hard to understand. As a result, you do nothing.

However, what if the worst does happen? What plan do you have in place to protect you, your family and all the things you have worked so hard for? Don’t let a lack of understanding about Income Protection stop you from taking steps to protect all that is important to you. Read on to find out more.

Key Ideas:

What is IP (and what it is not)?
When would you need it?
How is the cost figured out?
What is Agreed Value, Indemnity and LOE all about anyway..?
Pricing examples

What is IP (and what it is not)?

Your ability to earn is often your biggest asset. Being suddenly disabled or suffering an illness or injury can prevent you from working for an extended amount of time. This can dramatically impact your life, especially if you have family to take care of and financial commitments.

Income Protection insurance is there to provide you with a monthly payment while you are not receiving your salary or wage. This means that you can continue to pay your ongoing financial commitments such as mortgage/rent and your day to day living expenses. This gives you peace of mind so that you can focus on recovering and getting back to work.

Depending on your income protection policy, you can receive up to 75% of your pre-disability income. A number of the insurance providers also offer rehabilitation and support benefits with the aim of assisting you with returning to work, or improving your capacity to work.

It is important to note that Income Protection will not pay out if another source of income is paying, such as ACC which is the most common one. If you have an accident, ACC will pay you up to 80% of your declarable earnings. This is easy for an employee to figure out but can cause problems for those self-employed. The caveat here is that IP can be used to ‘top-up’ your cover where ACC isn’t paying you. This might be because you are using ACC’s ‘agreed value’ product (CoverPlus Extra), or your income exceeds the maximum benefit amount under the ACC policy.

If you are self-employed you may want to look at ACC CoverPlus Extra (here) this allows you to have an ‘agreed value’ policy with them. This can mean you have certainty should you need to claim. It also takes some of the guesswork out of ACC benefits, which can be a bit of a minefield. Talk with your adviser to find out how to save on your ACC, while increasing the cover that you can have. Many times, you can pay less, but have more cover.

There is often the misconception that Income Protection is there to cover you if you ‘lose your job’, this is not the case. This type of cover will not help you if the company goes bust and leaves you without work. This cover will not help you if you take voluntary redundancy. As with all personal insurance, it is around your physical and mental health. If you have a condition or injury that means you cannot work, you have the option to make a claim. It is there to cover a portion of your income and to plug-the-gap until you can get back on your feet again,

When would you need it?

Many people may manage for a few weeks with a combination of sick and annual leave if they get sick. What happens when this runs out and you are unable to work for months or even years?

Here are some common reasons for having an income protection policy:

Here are some other stats to consider from Asteron:

More than 8-in-10 of Asteron Life claims were made by men
The youngest person to claim was just 23 years old
7 out of 10 of people who claimed on their Asteron Life Income Protection were aged between 36-55 years old

We all know that these things can happen to anyone. How financially prepared would you be if one of these things happened to you? Would it be good to have Income Protection Cover to ease the burden, by paying you a monthly benefit for the period of cover or until you are able to work again?

“Having income protection has been a godsend. If we didn’t have it, we would have had to sell our house in order to have something to live on, and go rent somewhere. Everything would have been so different.” Pam, Asteron Life customer

How is the cost figured out?

The amount you will pay for Income Protection depends on a number of things including your age and occupation. The more risky your occupation, the higher the premium can be. That said, here are 3 key components to how Income Protection premiums are priced:

Monthly amount sum insured (normally up to 75% of your gross income)
How long the insurance company will pay you for – this is normally 2 years, 5 years or through to Age 65 (and beyond in some cases)
How soon the insurance company will start paying you. This is called the waiting period and is normally 4, 8, 13, 26, 52 weeks.

Once you know which insurance option is right for you, you then choose the time you will wait before you start receiving payments and how long you want to receive them for. For example you can choose the wait period for your first payment to be as soon as 4 weeks and for payments to last for 2 years, 5 years or until age 65 or even to age 70.

In some cases a 1 or 2 year wait period might suit you best. It all depends on how well you’d cope financially before the payments kick in.

Things to keep in mind, which impacts the cost to you in terms of higher premiums are:

The longer the insurance company pays you out (i.e. through to Age 65)
The shorter the waiting time for your payment (i.e. 4 weeks)

Many providers offer optional ‘extras’ that you can have, but you’ll pay more for these, these could include:

Death benefit
Total & partial disability
Special injury / Specific illness condition
Claims escalation
Mental health exclusion (you will pay less but will not be covered for any mental health condition resulting in you taking time off work).
Redundancy (this only pays for 6 months, and voluntary redundancy is not a valid reason to claim)

In terms of premiums (payments), you can choose to go with a yearly renewable premium that is fixed for a year at a time and increases as you age or you can choose a fixed-price premium for the life of your policy. This type of pricing plan is often known as ‘levelled premium’. It can be a great way to save on the cost of the policy over time.

Everyone’s circumstances are different and your adviser can recommend the best cover for your situation.

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What is Agreed Value, Indemnity and LOE all about anyway..?

Income Protection policies can come in different shapes and sizes. However, some common variations are as follows:

Agreed Value

Benefit payments are based on a proportion of your income agreed at the time you take out your cover, this is calculated on your gross income. If you are self-employed your gross income is averaged over the last two to three years. This approach allows certainty about how much your monthly claim payments will be.

Indemnity Value

Your benefit payments are based on a proportion of your income at claim time, before you suffered the illness or injury. Up to 75% of your gross annual income can be insured if you select this benefit. This type of cover is often more cost-efficient, though there can be downsides if your income fluctuates. In most cases, the premium cost of this can also be an annual tax deduction (check with your accountant).

Loss of Earnings Cover (LOE)

This option allows you to choose at claim time how your benefit payments are calculated. Based on either an agreed value or indemnity, whichever is higher. This is helpful if your income fluctuates, for example as a contractor or if you’re self-employed. Often, this type of policy will be the most expensive.

Pricing examples

Here are some examples of pricing, based on a number of different factors.

The examples I am using are as follows: An Occupation Class 2 (e.g. office worker), non-smoker with an average gross income of $60,000 per annum. With insurance up to 75% of their gross annual income, they would get a monthly payout of approximately $3,750.

Based on this situation the tables below provide two examples across 3 age bands; 25, 35, 45. I have used fortnightly payments under two different scenarios. All prices are indicative only, based on figures provided from 5 of the top providers in New Zealand.

Example 1 – 4 weeks wait for 2 years benefit- prices per fortnight

	Age 25	Age 35	Age 45
Female	$25.58	$34.44	$54.66
Male	$19.01	$22.35	$34.40

Example 2 – 13 weeks wait through to Age 65 – prices per fortnight

	Age 25	Age 35	Age 45
Female	$27.37	$34.40	$63.10
Male	$20.60	$22.26	$38.45

[Does not include waiver of premium costs or policy fee, which are likely to be added to any policy taken.]

As you can see from these tables, women are deemed to be a higher risk earlier in their lives, certainly around their late thirties to late forties. The actuarial data shows that women will have a higher claims rate during this time.

Men have an easier time until they hit mid-to-late forties, then unfortunately, it is all downhill from there. While the men are struggling in their later years, women will generally have less claimable events and survive past their male counterparts.

Please Note: all of this information is illustrative only, please consult your financial adviser for a personalised quote for your situation and stage in life.

Income protection is a great product, but it can be hard to grapple with as there are many variables that need to be considered based on your requirements. Add to that, all of the industry jargon to understand, and it can be easier to see why some people feel it is all just too hard. Less than one in five eligible people in New Zealand have this type of financial protection in place. By not having it, the financial ramifications for people who have a sickness or injury, can be huge.

Essentially, Income Protection is providing you with the assurance that should anything happen to you, you will get some financial stability from your insurance to help you get through. The tricky part is getting the right cover and keeping the cost within your budget. This is why having a good adviser is really important, as they will tailor your Income Protection to your needs and circumstances.

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Dominic started Bolster Risk Management to help people along their personal finance journey.

He believes that personal insurance is the bedrock to financial security and wealth creation. You have to protect your greatest asset, your ability to earn an income.

Underpinning this is a philosophy that says Your Money Matters.

The post Income Protection Made Easy first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

9 Things You Should Know: Mortgage Repayment Cover

Dom Bish — Sun, 17 Oct 2021 03:17:15 +0000

https://bolsterriskmanagement.com/

Mortgage protection: What is it? Why should you have it?

You have a mortgage; finances are tight because you have stretched yourself so much just to get a foot on the housing ladder. Then you get sick and cannot work for the next 2 years. What happens to your mortgage? Is your new home now at risk of being taken away?

You are renting; You’ve tried the property ladder, but right now it is out of reach. Your family relies on your income to keep paying the rent. Then you have an accident and cannot work for the next 5 years while you rehabilitate. What happens to your family’s home? Is it now at risk of being taken away?

These two examples are basic, but they help to illustrate the majority of reasons why people get this type of personal insurance. Below is a list of nine things you should know before you talk with your financial adviser.

The purpose of disability products
Home mortgage – not investment
“I don’t have a mortgage” (then, use your income)
“Offsets’’ not applied
4 core cost components
Add-ons and additional benefits
Premium type: YRT / Level
Partial Payment Benefits
Common Claims

1. The purpose of disability products

Mortgage protection insurance, is in a suite of products that you might hear referred to as income replacement, or disability insurance products. They will pay the benefit to the effected person on a monthly basis, until that person goes back to work, or the benefit period ends.

Generally, it is “Agreed Value”. This means that the amount insured, also known as the ‘benefit amount’, is agreed at the time of application. There are other income protection products that will determine the benefit amount at claim time.

If you are unable to work due to injury or illness, the benefit will start paying you, after the “waiting period”.

Typically, people may have a mix of both mortgage repayment insurance and income protection. This is because both works slightly differently, although they compliment each other very well.

2. Home mortgage – not investment

You can insure up to 115% of home mortgage repayments. Why 115%? Interest rates can fluctuate – so this amount gives you a buffer. Not all insurers will go to 115%, but most will do 110%-115%. However, they will require proof, like a bank statement.

The insurance can only be on your home mortgage, not on your investment property. Your tenants will continue to pay you rent, even if you have the accident. Therefore, with this product, you are not protecting that financial risk.

3. “I don’t have a mortgage” (then, use up to 45% of income)

Many providers will allow you to use 40-45% of your gross income, instead. Not everyone has a mortgage. This means that you can use the benefit, should you need to, towards paying your rent. You will need to provide the insurer proof of your income.

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4. “Offsets’’ not applied

Unlike many income protection products, mortgage repayment benefits will not be ‘offset’ by other income sources. This means that you can still receive your mortgage repayment insurance (MRI) and the other income.

In New Zealand, many people think of ACC is this context. If you have an injury, you may get some ACC assistance, and, the benefit paid by your insurer.

This type of cover is not normally classed as taxable income. Again, unlike many income protection products, which are taxed as income, typically, MRI isn’t.

5. 4 core cost components

As with the other products in the income replacement suite, there are four main points of price:

The amount you are insuring
The waiting period – the longer the wait, the cheaper the premium
The benefit term – the shorter the benefit is paid, the cheaper the premium
Occupation Class

The waiting periods from most providers are 4 weeks, 8, 13, 26 and 52 weeks. For example, you might choose a longer waiting period if you have some income protection already in place. It depends on the risk protection strategy that you are working on with your financial adviser.

The benefit periods are typically 2 years, 5 years and through to age 65. Some insurance companies will go beyond age 65, which is becoming more relevant as people are working longer than the historical retirement age.

The type of occupation that you do will also determine the price. Some jobs are just riskier than others. Unfortunately, some roles are not covered at all. Each provider has their own definitions and criteria.

6. Add-ons and additional benefits

Another seven articles could be written on this point alone! There is a lot of variety among the insurance providers in the add-ons and ‘extras’ that they offer. They all try to find their own niche in the market, and this is one area that they can deviate from the competition.

Effectively, the insurance firms offer product enhancements, of which some are built-in, the others are optional (paid) extras.

You might come across things like:

Funeral (or bereavement) benefit
Permanent disability benefit
Recurrent disablement
Rehabilitation and support
Childcare support benefit
Mental health discounts
Inflation protection

The range is wide and list is long.

7. Premium type: YRT / Level

As with many personal insurance products, you can elect two ways to pay.

The first is yearly renewable term (YRT). This is effectively saying that your contract is yearly, with the price re-setting each year. It will increase, because you get older, there will be inflation, and the cost of the product will change.

The second option is ‘levelled’ premiums. Here the contract is over ten or more years and you pay the same amount each year. However, yes, you have price certainty but the premium in the early years is higher than you would pay on YRT. The upside though can be significant. As you progress through your contract, the amount you pay will seem less and less compared to the YRT premium. In many cases you could potentially save thousands of dollars over the life of the policy.

Level vs YRT = price certainty & high long-term savings vs lower initial cost and a potentially costly product over time.

8. Partial Payment Benefits

Many insurers will offer partial payment benefits. This might be for a specific injury or a listed critical illness. It does depend on the provider, and you will need to be aware of the fine print.

Often these benefits will be paid in addition to the monthly-paying benefit that you receive.

For example, a fractured wrist may not mean that you need two years off work, but it will cause you some financial difficulties if you are a tradie or a surgeon. The specific injury benefit might be handy here.

9. Common Claims

The different companies have slightly varying statistics on their claims. However, for the disability products like mortgage and income protection, the top claims are as follows:

Muscular and joints (including back issues and accidents)
Cancer
Mental illness/ workplace stress
Neurological conditions and stroke

Asteron Life, who is one of the major providers has it illustrated as this

While it may appear that mortgage repayment insurance is a minefield with different options, much of what I’ve discussed is quite straight forward. In saying that, choosing a financial adviser to walk you through the product is a smart move. Let the professional help you navigate the right options that suit you and your situation.

The post 9 Things You Should Know: Mortgage Repayment Cover first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

What is the Cost of Personal Insurance?

Dom Bish — Thu, 14 Oct 2021 03:54:33 +0000

https://bolsterriskmanagement.com/

17 Things You Need to Know

Personal Insurance – where are the costs?

There are many things that make up the cost of insurance, depending on what you are getting covered for. It is not like buying a can of baked beans. Clearly. That said, we don’t think it is some sort of ‘black- art’ that needs to be kept secret from the public, either. At the end of this article you should have a much clearer understanding of the terminology and jargon used, as well as an understanding of the building blocks for your premium There are about as many types of insurance as there are brands of beans, so we’re going to focus, in this article, on what we call “personal risk”.

The 5 key product categories are:

OK, you could argue that this is not the most inspiring line-up for a discussion! But it’s critical that you know what these things are, how they’re priced, and how being covered for any or all of them can make a significant difference to your life.

Pricing Considerations

Below is the list. It’s a snapshot that captures the most commonly considered factors when companies are pricing your insurance:

1. Your age

2. If you smoke

3. Your gender

4. Your BMI (Body Mass Index)

5. Other health issues/pre-existing conditions (these impact loading)

6. Level / YRT (Yearly Renewable Term)

7. Disability Insurance (or DI cover)

- Monthly benefit amount
- Wait Period
- Benefit Term

8. Health

- Excess Options
- Hospital vs day-to-day cover?

9. Trauma

- Life Buyback
- Reinstatement

10. Accelerated vs Stand Alone

11. Total & Permanent Disability (TPD)

Own vs Any occupation

12. Occupation Class

13. CPI – Consumer Price Index

14. Insurer’s product cost

15. Multi-benefit, multi-product discounts

16. Kids trauma – Free or not..?

17. Future Insurability – what is it?

We will go expand on these bullet points below.

We have a range of tools to help you

It can be hard to figure out how much cover to get.

This simple tool is a step in the right direction. It won’t have all the answers, but you’ll have a much greater understanding of what you should be thinking about.

Some of these pricing building blocks may apply to all insurance products, some will be specific to the product category.

For example, the reinstatement option for Trauma applies to Trauma and not health insurance.

Note: This information is not meant the take the place of a policy document. Also, each insurer may use slightly different terminology. And remember, life insurance discussions inevitably involve facts and stats that some of would prefer not to face. Don’t be put off by our directness here: this is important (It’s your life, after all!) and it’s our job to be clear, direct, and factual. And with all that said, let’s move on: we think this information we’ve gathered up and clarified will really help you when you discuss your protection plans with your financial adviser. And that’s some really good news.

1). Age

Age is a key factor in price. Statistically, as we get older, more wears out and goes wrong. You’re more likely to have heart issues in your 50s than your 20s. And the longer you stick around, so do you increase your chances of having an accident. It’s just statistics, and it’s not worth arguing with! But it impacts your premium costs.

2). Smoker

The health risks to smokers are well known. Smoking drastically shortens your life expectancy and increases your chance of getting a whole raft of health conditions. As these risks increase, the insurance companies want to ‘off-set’ their risk, by charging you a higher rate (or premium) for being a smoker. Interestingly, and worth being aware of, some insurers have adopted a similar view to vaping too.

3). Gender

Men and women are biologically different. (Who knew?!). The point is these differences mean that statistically, different conditions are likely to impact women, and at different times in their lives, than for men. Generally, the pricing on women tends to be higher when they’re younger, and then lower than men in later years.

4). BMI – Body Mass Index

Essentially, this is the ratio between your height and weight. Although it is a far from perfect measure, (a weightlifter, for example, is both large and fit), people with
higher BMI scores are statistically more likely to have issues with diabetes and cardiovascular conditions, and the insurers price accordingly.

5). Loading – Other Health Issues & Pre-existing Conditions

Pricing insurance is definitely not black and white, especially around health. People carry myriad conditions throughout their lives, and these often come and go. An insurer, then, will assess a condition you may have as “borderline” and rather than exclude you on that basis, they will ‘load’ your premium to account for this. This minimizes their risk. Remember, these things can be re-evaluated within a set time period, and loadings can be removed when conditions clear or are managed to a degree the insurers are happy with. And if your condition is ongoing, you’re simply paying a little more to accommodate that.

6). Level / YRT (Yearly Renewable Term)

Most premiums nowadays are set out as YRT, which effectively means that the contract ‘renews’ each year. (Anyone with insurance is familiar with getting their renewal letter in the mail telling about their premium increase.) Even though you may be paying fortnightly or monthly, the agreement you have in place with the insurer is an annual one.

There is another process that is growing in popularity which is known as the Level Premium. An easy way to think of it is like fixing your mortgage repayments (whereby you can request with you bank to pay the same amount each fortnight on your mortgage, irrespective of interest rates changes, for a set period. The Level Premium option works on a similar basis. You can fix the amount you pay for a specified term, usually through to the age of 65 or 70, although some insurers restrict the term to ten years.

As with fixing your mortgage, there are significant cost-savings to the Level Premium process, but there are fishhooks too. Definitely one to talk through with your adviser.

7.1). Disability Insurance (or DI cover) – Monthly Benefit Amount

The amount of cover that you specify is a key factor in your price. This applies for all insurances (except Health and medical, which behave differently), and it’s pretty simple: the more you insure yourself for, the higher the premium.

7.2). Disability Insurance (or DI cover) – Wait Period

A key component of DI cover is how soon you will start receiving payments post our event, known as the “wait” period. Most will start at 4 weeks, but there are typically options like 8/13/26 weeks (and beyond). Essentially, the longer the wait time before you get any payout, the lower the cost to you.

7.3). Disability Insurance (or DI cover) – Benefit Term

The benefit term is how long the insurer will carry on paying you a monthly disability benefit. Generally, the options are 2, 5 years or more, right through to the age of 65.

The longer the term, the more expensive the insurance. It makes sense, really: if the insurance company has to pay you monthly for the next 30 years of your working life, because you have chosen the Age 65 option, this will cost you far more, than if you’d chosen the 2-year option.

Body Mass Index is a simple tool that helps insurance providers.

The index helps the insurance underwriters to assess the ‘risk’ that you might pose them as a policy holder.

A very high (or low) index, may mean that there are underlying health conditions.

Check out the calculator for yourself.

8.1). Health – Excess Options

This is where you get some power back! Your excess gives you some future control over your health insurance. It works much the same way as an excess on home/car insurance may have an excess, you can do the same with most modern health covers.

8.2). Health – Hospital or Day-to-day Cover?

We’re getting spoiled for choice now! The type of cover that you have with health
insurance plays a large part how the price is calculated. Generally, day-to-day cover,
such as seeing your GP, prescriptions, or dental & eyewear are in many cases what we call “dollar-swapping”, i.e. paying via premium what you’d spend anyway. Or, to
be a little more direct, it’s like insuring the wingmirror on your car and not the chassis and engine.
Insurance is about covering the risk you cannot ordinarily cover yourself. Most people cannot afford the $20,000 cancer operation, so they’ll buy insurance to cover that. Buying insurance to cover yourself for a $60 trip to the doctor doesn’t make much financial sense.

9.1). Trauma – Life Buy Back

When Trauma cover is accelerated (see the article “What is accelerated… does it go faster?”), you can elect to have the Life Insurance component ‘brought back’ to the sum insured, prior to the trauma claim.

9.2). Trauma – Reinstatement

This is an option whereby after a trauma claim, you can elect to have the Trauma cover reinstated, to have cover again, should you need it in the future. While this is a great option, there are a number of fishhooks with it. Again, speak with your financial adviser to get a good understanding of the limitations with this option.

10.). Accelerated versus Stand Alone

You can have your trauma (or TPD) cover ‘accelerated’ to your life cover (see the blog post on our website, “What is accelerated… does it go faster?”) Essentially
this means that if you make a claim on your trauma, then your Life insured amount
decreases by that amount. The risk then, is that you have less in your life cover should you need it.
Accelerated is an economic method of stacking your insurance to cover your risks while on a budget. Again, oner a conversation with your financial adviser.

11). Total & Permanent Disability (TPD): Own vs Any Occupation

There basically two types of TPD cover. TPD pays a lump sum if you are unable to work. You can opt for this to be applied specifically to in your own occupation, or occupations in general. The second option will be less expensive, but depending on what you do, you may need to opt for the first. There is obviously an assumption here about just how severe your condition is. For you, to be unable to work in any job
whatsoever is obviously a tougher situation than being unfit for your own specific
skillset. Yet from the insurer’s perspective, the “any occupation” option is a lesser
risk. It’s a bit, as they say, complicated!
(See the blog post on our website “TPD – Is that contagious.. ?” for more info this).

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12). Occupation Class

The type of job you do may expose you to greater risks than other lines of work.
Therefore, especially with monthly-paying disability covers, different jobs will attract different rates. You may assume that an arc-welder will be more expensive to insure than a high-level corporate. You may be right; the welder faces dangerous conditions on a daily basis. That said, a CEO will also face higher risks for stress and mental illness days and will therefore attract expense that way.

13). CPI – Consumer Price Index

Also known as inflation, this has the same effect on insurance as it does with other goods and services; they track upwards over time.

14). Underlying Cost Of The Insurer’s Product

Insurers spend a lot of time making sure that they can sustain their ‘book’, which
consists of the clients that make up all the policies that the insurance company looks after. Claims data and ‘pooled product risk’ – the number of claims on a certain product – all contribute to future costs. The more claims, the more financial strain on the ‘book’. In order to keep the book viable for everyone in it, the insurer will review their pricing regularly, adjusting their prices to you, the client, accordingly.

15). Multi-benefit discounts, Multi-product Discounts

It’s a competitive market, so most firms now offer some type of bundled discounts.
They may call it different things, and structure it all slightly differently, but essentially, it’s around customer loyalty: the more you stack with them, the lower your price per product. Some of these discounts can be significant, especially when
you are getting close to or beyond 10-12% discounts on an annual premium.

16). Kids trauma – free of not..?

The are several top-tier insurers who will offer some form of free trauma cover for children, as long as the parents have a certain amount of trauma cover. On top of this, some companies will allow you to purchase additional trauma cover for children.

17). Future Insurability – what is it?

This is another option that can be available with some life insurance policies. Again, the names might be different depending on which firm you deal with, but it effectively offers your a chance to increase your sum insured without needing to be underwritten for the increase. Meaning? Usually, is you want to increase your risk with the insurance company, they want to ask you a load of questions again, to underwrite you.

This Future Insurability Option allows you to increase your cover without needing to answer quite so comprehensively about your changed health situation. Obviously, there are conditions that apply, specific to each provider, but it simplifies things for you. And that, let’s not forget, is what we’re here to deliver! Simplification, and clarification.

Final thoughts

These are the 17 things that most influence price in personal insurance. This is by no means an exhaustive list but it should have given you valuable information about the price for insurance and, most importantly, how the different choices you make will affect your final price.

As you can see, there are many variables, depending on your needs, what you want, and how you want your risk protection plan to work. Remember, no one knows what is going to happen in the future. We are simply trying to find the right financial protection if that unexpected event happens to you.

Feel free to speak with us, or your financial adviser, about any of the points we discussed above. The ultimate objective is that you can get the right protection that you need for you and your family, at a price that is right for you.

The post What is the Cost of Personal Insurance? first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

6 secrets you need to know before you get disability insurance

Dom Bish — Fri, 09 Jul 2021 05:49:15 +0000

https://bolsterriskmanagement.com/

6 SECRETS YOU NEED TO KNOW BEFORE YOU GET DISABILITY INSURANCE

Personal insurance can be a minefield.

84% of people don’t have monthly-paying disability cover in New Zealand.
81% don’t have critical illness cover.

If you were unable to work due to accident or illness, how would you household survive financially?

Do you understand why you should have disability insurance?

In my experience, most people know they should have this cover. But most people do not want to think about worst-case scenarios. Most people will actively avoid thinking about worst-case situations.

I get it. I understand. But…

Sticking your head in the sand won’t help you when the proverbial smacks your butt.

I called them “6 secrets…” to get your attention. Now I’ve done that, let’s get to it. Yes, personal insurance can be a minefield. But having professional and personalised advice will make the process easier. This not personalised advice by-the-way. I don’t know you. But I will outline some simple concepts so that when you speak with your adviser, you can have a robust chat about things that are relent to you. Ready?

1). What is the financial risk that you are insuring for?

Seems simple enough, we can think of the worst possible circumstance and then put something in place to minimise the financial damage. However, sometimes things are not that bad. So, do you need to the gold-plated, deluxe all-you-can-eat platter? Or is there a mid-point that is kinder to your bank balance?

The key thing with this type of protection is, you are managing the risk that you lose your income, either partially, temporarily or permanently. The following three points all link off this one…

2). Permanent & total disability or temporary disablement
One pays you a lump sum, the other pays you monthly for a nominated amount of time (2 years through age 65 and beyond). Both serve a purpose. Both come at different costs. Check out my article here about keeping the costs down on monthly paying benefits.

Statistically, we know that the majority of people will be back to work after accident and illness within 18-24 months. However, do you want to take the risk that you might be one of those rarer cases who are permanently disabled?

This is not an either-or situation. You can have both and structure your cover to still maximise your protection while being kind to your monthly expenses.

3). How much income is to be replaced…?

With the monthly paying benefits, the maximum amount you can protect is 75% of your gross earnings. There are conditions and caveats that I will not go into here. That said, if you are accustomed to living with a certain level of income, what would happen if you even lost 25% of it? Could that hurt your family. Now imagine that you don’t even have the basic cover in place. How do you replace 100% of your income?

With TPD, or what we know as permanent disability, the target amount is harder to gauge. For some, they will calculate how many years of potential working life they have, multiply that by their annual income, and that will be the amount. For others, they will just use their income multiplied by a few years, added to a debt repayment amount. This clears their debt and gives them a buffer a few years. You can obviously do less or more as your situation, budget and risk protection goals allow.

4). Short-term or through to retirement (what is the replacement value in years…?)

Similar to the point above, are you looking to replace your income for a couple of years or much longer?

Remember the longer you insure for and the larger the benefit (the amount you get paid), the higher your monthly premium. If you want that gold-plated all-you-can-eat platter, then you will need to pay for it.

In my experience, many people want the best, but will settle for what they can comfortably afford if it matches their key goals.

The challenge for you, is to determine what your key risk protection goals are. This is where an experienced and professional insurance adviser will help you.

5) Don’t forget the home executive – who looks after the kids and runs the house?

Many times I see families where the main income earner is thinking about themselves and their ‘financial contribution’. This is great and a good way to start the analysis process. However, family units have contributors in others ways. Looking after the home and children, while not producing an income, is still a vital activity and central to the family nucleus.

What happens if that person is incapacitated? Who looks after the kids and the house then? The income earner? But then where does the income come from…?

While we tend to focus on pure financial risk management, having a broader perspective on the family can be just as worthy. Financial risk can impact from different sources. At least think these risks through and discuss with your significant other. Create a plan that suits the family and not just one person.

6). You don’t have to get it perfect first time.

Insurance is a moving target. Life changes, stuff happens, circumstances will force you to make different choices. What is relevant to you today will not be the same in 5, 10 or 15 years’ time. That is ok. That is part of the gig. Be flexible in your expectations.

As I have mentioned a few times, personal insurance can be a minefield. Knowing how much life insurance, disability insurance, income protection or mortgage repayment cover is required, is just one aspect. Each insurance product has their own unique characteristics. And each insurance provider has their own particular pros and cons. The top providers work hard to make sure their products have a unique spot in the market. Your professional insurance adviser will help you navigate those differences, so that they find you the right protection, matching your circumstances to your budget.

Dominic started Bolster Risk Management to help people along their personal finance journey.

He believes that personal insurance is the bedrock to financial security and wealth creation. You have to protect your greatest asset, your ability to earn an income.

Underpinning this is a philosophy that says Your Money Matters.

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Protect Your Biggest Asset

Dom Bish — Thu, 25 Mar 2021 03:34:07 +0000

https://bolsterriskmanagement.com/

Protect Your Biggest Asset

What is your biggest asset? Unless you’re Kim Kardashian or earn a royalty income, your biggest and most enduring asset is probably your ability to earn an income. Most of us have insured our house, possessions, cars and our lives (even our phones!). But if you don’t have disability insurance, the most important asset you have is still unprotected.

Key Points:

What Are the Chances of Actually Needing to Use Your Disability Insurance?
How to Get Disability Insurance
Some factors that influence the premium

Consider this: if you currently earn $50,000 a year and you’re 25 years old, from now until you’re 65 you’ll earn $2 million. That assumes your income never increases, which it almost certainly will.

Doesn’t that seem like it might be worth protecting? Is your house or car worth $2 million? Most of us don’t own any single object worth $2 million.

What Are the Chances of Actually Needing to Use Your Disability Insurance?

Disability insurance insures your ability to earn income. Many people hear the word “disability” and immediately think of an accident. But most long-term disabilities are the result of illness, such as heart disease or cancer. In New Zealand, 1.1 million people (24%) identify as having a long-term disability*.

Not only that, but 4 in10 men and 6 in 10 women will statistically be off work for 30-90 days due to accident or illness before age 65.

What about the benefit?

The government does provide benefits, but qualifying is not always easy. The benefits provided are rather limited, even for the most frugal of people.

So how about ACC?

If you’re an employee, ACC will pay you 80% of your income while you’re on claim, but they only cover accidental and road injury. Of all people who are off work long-term, only 20-25% are on ACC. There is a much higher probability of you suffering a trauma, or significant health event that leaves you unable to work. 68% of people between the ages of 30 – 70 will suffer a trauma event. These are not covered by ACC.

How to Get Disability Insurance

Large employers typically offer short-term and long-term disability insurance. This coverage is frequently affordable and will cover 50-60% of your salary. The total pay-out may also be capped.

If you prefer or need to go with an individual policy instead of through your employer, be aware that they can be quite expensive, but have far more flexibility to provide what you need. The cost of an individual policy can vary dramatically. As a ‘rough-rule-of-thumb’ but expect to annually pay 1%-3% of your salary to replace up to 75% of your salary.

Some factors that influence the premium include:

The monthly pay-out. Obviously, the more money you would receive each month in the event you suffer a disability, the more your policy will cost.
How “disability” is defined. Does it pay if you are unable to do your job? What if you can work part of a day, but not the whole day? Be sure you know what you’re getting, and what you’re not getting.
How long is the waiting period before you start receiving your payments? The longer the waiting period, the less expensive the policy will be.
1. This is a good reason to have that 4-6 month cash reserve you’re always hearing about. If you don’t currently have it set aside, get started today!
How long does the benefit you for? Generally, the benefits will pay you for up to 2 years, 5 years or through to age 65 (and sometimes beyond). The longer the payment, the higher the price
Your occupation. Some jobs are simply more hazardous than others. Everything else being equal, a construction worker should expect to pay more than an accountant.
Cost of living. Some policies cover cost of living increases. This can make a big difference, depending on the length of your disability. Typically, you will see this shown as ‘indexing’ or CPI/ inflation.

Disability insurance is the insurance that everyone seems to forget about, especially those who are self-employed. But this may be the most important insurance you can purchase! Look into disability insurance today; your future and the future of your family may depend on it.

The post Protect Your Biggest Asset first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

you are not actually bullet-proof

Dom Bish — Thu, 25 Mar 2021 03:28:13 +0000

https://bolsterriskmanagement.com/

I’m too young for insurance – you are not actually bullet-proof

If you are under 35, do you have car insurance? Maybe, but maybe not. If you do have car insurance, does your car earn you money? Do you have protection for your greatest asset? What is your greatest asset? [spoiler – it is not your car!]

Key Points:

Do you insure your car? Maybe, but maybe not
Types of cover for the under 35s
Better to be too early than too late

Under 35 years old.

So, let’s take a guess at you. You are not 35 yet, and though you may have a long-term partner you are not yet ready to plunge into the world or marriage, house and kids. Perhaps you are still renting with mates. You don’t have a huge amount of debt, although if you die, your estate (and by extension, the people you leave behind), will be responsible to pay your debts for you. Your Student Loan (if any) doesn’t count as that is cleared upon death.

For that quick assessment, you probably don’t need much life cover. Perhaps enough to cover the funeral if you don’t have debt. If you do have debt, someone else will have to pay that, so you might want to have enough life insurance to cover that too.

You insure your car. Great, why don’t you insure your income-earning ability? Is that worth it?

If you are munted, who pays for you while you get better?

What if you don’t get better?

What if you are munted for the rest of your life. Then what?

Do you think that only old people get cancer/stroke/heart issues/MS…? You only feel bullet-proof, but (another spoiler alert) you are not actually bullet-proof..!.

Types of cover if you’re under 35

We’ve discussed life insurance at the top. But what about ‘living insurance’? This is where you have a ‘health event’ and you survive. You can use different types of personal insurance products to help pay your rent and expenses. These might be in the form of a lump sum payment, such as Trauma care, or Total and Permanent Disability. You may also qualify for monthly paying benefits, like income protection or other income replacement products.

Unlike lump-sum benefits, Income Replacement needs higher financial and medical history. If you are a contractor, it may be harder to prove your income is stable.

Think about levelling your policy. You can save thousands of dollars (no, that is not a typo). You will thank me when you are 60…! Levelling your premiums is a little like ‘fixing a mortgage’, where the repayments are same over the years.

Health & Medical cover? This might be good for you. If you are really worried about cancer cover and stuff that you cannot get on the public system, these products can be good for you. If you have savings, have an excess on this type of policy. The bigger your excess the smaller your premium. Unfortunately, you cannot level this one – the cost will go up each year.

Insurance. Better to be too early than too late

If you have a choice about getting protection now or waiting, get it now. You can roll the dice of life, but the odds are against you.

68% probability of getting trauma event between 30 – 70 years old
Of all long-term off work people, only 20-25% are on ACC
32% of injured people take longer than 10 weeks to return to work

You may be one of the lucky few that I come across, who’ve not experienced any loss of income due to unfortunate health events. Maybe. But between now and 70, you have an increasing probability of having a significant health event that impacts your income. That is probably a risk that you don’t want to take. Probably.

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