mortgage repayment 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.

Check out our podcasts.

There are over 40 to listen to, and most are less than 10 minutes.

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..

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.

Is Trauma Critical?

May 29, 2020 No Comments

Trauma cover is a great financial risk product that can be very beneficial. However, as with all things insurance there is the good, the bad and the ugly. For many clients that I see for the first time, especially people

“What is ‘accelerated insurance’ – does it go faster..?”

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Without trying to sound like a politician, the answer to the above question is “yes… and…no”. It can “go faster” and serve its intended purpose and then disappear in a puff of smoke (like the recent claim example I

How Long Before Insurance Companies Pay Up?

August 23, 2020 No Comments

Some of the people I talk with wonder how quickly insurance companies pay claims. As with many things to do with personal insurance, that answer is ‘it depends’. … Read More

9 Things You Should Know: Mortgage Repayment Cover

October 17, 2021 No Comments

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. … Read More

MONEY: Buckets & Automation

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you are not actually bullet-proof

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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

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What Is The Best Age To Get Life Insurance?

Dom Bish — Tue, 28 Jul 2020 18:08:21 +0000

https://bolsterriskmanagement.com/

The younger the better. Simple answer. You don’t need to read anything else.

Ok, so you’re still reading. Life insurance is all about managing risk. What is risk? Roll a dice. You have 1 in 6 chances of getting a 6, or you have 16.6% chance of getting a 6. You have a 20% chance of getting cancer because you live on planet Earth. That means, if you are in a room with 10 people, you know statistically that two of you will get cancer. You just don’t know which 2. That is the risk. More importantly, you don’t know when two of you will get cancer. Don’t make the assumption that only old people get cancer (to continue using this example), Starship hospital in Auckland is full of children who are battling cancer.

KEY TAKEAWAYS

If others depend on your income then you need life insurance
If you have debt – then you need life insurance.
The sooner you purchase life insurance, the better – pre-existing conditions
The sooner you purchase life insurance, the cheaper the cost

Many of you reading this will have a job. Many of us contribute to a household in some way and are responsible for someone else. The money you earn goes to pay for rent, mortgage, food, clothing, cars, school trips, Spotify, Sky Sports, after-school activities, grandma’s groceries, paying off the credit card… Yup, we earn money and the money goes away.

What would happen if you died? That income would stop. That is why you have life insurance. It providers a lump sum to the people you care about. Even if that is only equivalent to a few years of your income, they are a few years where your family can grieve and learn to live and support themselves without you being around.

If you have debt

This is an easy one. Do you want your debt to become your family’s burden just because you went and got yourself killed falling off a ladder? That 10-year-old BMW you like so much, that you’re paying $500 a month for, might be ok while you’re working. But once you’re dead and the income stops, can your family support that?

What about the mortgage? Let’s say your repayments are $2200 a month. If that debt has been paid off by a life insurance policy, your family don’t need to find an extra $2200 to survive. Suddenly their lives (financially at least) may be a little easier because you took out a policy.

Pre-existing health conditions?

The longer you live, the higher the chance of something going wrong with you (remember the dice at the start?) If you get life insurance while you are fit and young, any new conditions will be covered (as long as you stay with the same insurer).

The cost goes up the older you get

Death and taxes, the 2 certainties in life. Insurance premiums rising is another. However, it is possible to fix your premium in the same way you might fix your mortgage payments. There are some fish-hooks to be mindful of, and not all policies are the same. But if you start when you are young, you can save thousands of dollars on your premiums. Yes, thousands! For example, a 30-year-old male non-smoker could save over $14,000 on a $200,000 policy by the time he is 65. That type of saving is worth a look.

The correct time to get life insurance will change from person to person, depending on the circumstances. Basically, you need life insurance if other people depend on your income, or if you have debt that will carry on after your death. After all, you don’t want to leave them without money to live on… or up the creek because of your car loan.

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“It will never HAPPEN to me”

Dom Bish — Wed, 29 Apr 2020 21:38:53 +0000

https://bolsterriskmanagement.com/

A Fireman’s story

I have a recent client, a fire fighter with over 9 years experience, who was injured in non-fire workplace accident. It has meant that he will be off work for around 14-18months while he recovers back to full-time duties. He and his wife have some bare-essential cover for personal risk, some life insurance and a small trauma amount. They didn’t have any income replacement options, except the for trauma, which only pays on around 47 specific health conditions. Don’t get me wrong, trauma is a great product, but can be limited, as this experienced fire fighter found out.

Because his incident was a workplace accident, ACC are paying 80% of his pre-condition salary. This is good, but still a drop in household income for the family (there are young children in the household too). As this person returns to work, his ACC payments will be reduced pro-rata for the hours he works. The Fire Service will increase the salary payments to him, but there will still be a shortfall in household cash.

In New Zealand, we are very fortunate to have ACC, which is a state run accident insurer. We are also fortunate to have a social safety net with the WINZ sickness benfefit. However, this benefit is means tested, which effectively looks at all household income (not just the person effected) to deteremine how much to pay. The maxmium aailabe for this benefit is around $343 a week (less any other income for the household). Many families that I see would not qualify for this benefit.

Back to our fireman, one thing that this guy kept saying to me was, “I used to think it would never happen to me”. He is fit and sporty and thought he was bullet-proof. Know he realises that it can all change in an instant.

Gambling on Life

A Recent global Insurance Survey has estimated what the basic insurance is for a two parent, one child household.

To illustrate the level of underinsurance in Australia, Rice Warner’s Underinsurance in Australia 2017 report estimates the insurance needs for 30-year-old parents with children to be:

8x income for life (to replace income)
4x family income Total & Permanent Disability

This is for basic household cover.

Another source, from a financial planner (again in Australia) considers that the minimum cover should be

75% Income Protection with a 90 days wait period payable to Age 65
10x income for life insurance
10x income for Total & Permanent Disability

Against this, we can look at New Zealanders, and how many people do not have these types of insurance:

62% do not have Life insurance
86% do not have Income Protection
89% do not have critical illness protection

People think that

It wont happen to them
ACC will cover them
WINZ will cover them
They cannot afford it (any of it)
…They Don’t think about it

This puts the risk and financial burden on the family freinds and businesses to support theses people when the worst happens.

Let’s look at replacing your income for a short period.

ACC will cover me.. Right..?

ACC will cover up to 80 percent of your income in the event of an accident that prevents you from working. It does not pay an income income for you or your family iif you are too sick too work or have a trauma or certain kinds of disability such as a stroke.

The government will help… Right..?

The Government’s universal sickness benefit entitlement is around $343 a week. However this is only paid once all other household income is taken into account. This means that many families find themselves too well off as a household to qualify for a sickness benefit, but too poor to pay the mortgage and food bills.

Many families without income protection insurance find themselves experiencing serious financial difficulty v if the main household income earner were off work for as little as a month.

In many cases households will only last 4-6 weeks if all their income stopped tomorrow – this is what families tell me everyday.

Self-employed…? Look out, you could be in real trouble. Meet Pete…

Pete took out Income Protection 4 years ago when times were good. He was earning $100,000 consistently for a few years, times were good. In the last couple of years, there were different contracts, a couple went bad, in the last 2 years his income was only $75,000.

Pete has a great accountant who minimised his taxable income due to the deductible costs associate with the business. This means that Pete’s financial returns show that his taxable income is only $50,000.

2 clear issues

The IP that he got will only pay to his current provable earnings as he is on an Indemnity product
Any ACC claim will only pay to 80% of his proven taxable earnings ($50,000).

2 scenarios:

Pete has an accident and breaks his hand. He was having a bad day, momentary lapse of concentration, and the slab of concrete he was close to slipped its shoring. Luckily the hand should recover in 12-18 months.
1. ACC will pay Pete 80% of his $50,000 = $40,000 [this assumes Pete is on ACC Cover Plus , and not Cover Plus Extra]
2. The gap between what Pete actually got ($75,000/12=$6,250.00 ), and what he gets from ACC ($40,000/12=$3,333.33) is $917 out of pocket each month for 12-18 months ($35,000-$52,500).
Pete has a minor stroke. He is only 49, but he will be out of work for 12-18 months while he fully recovers his motor and cognitive functions.
1. Pete will not get ACC as this is not an accident
2. Pete will not get his income protection amount set at his prior earnings of $100,000 when he took the policy out, even though he has been paying premiums on this. Becasue Pete’s policy is Indemnity, the insurance company will want to see his financial returns. When they realise that his taxable earnings (even with some write backs) is closer to $60,000, they will pay on 75% of this lower amount each month (($60,000/12=$5,000.00) x75%= $3,750)
3. On Pete’s earnings of $75,000/12=$6,250.00, this will be $2500 a month less for his household to live on (or $30,000 less over 12 months).

Now if you are self employed, and see your self in Pete’s type of position, how would your household survive with $30,000 less a year? Remember too that the earnings from ACC and the Indemnity products are both taxable. That’s right, both are still yet to be taxed (in the above workings).

There are other products and strategies that can be put in place to limit these risks. The above is by way of example for people who believe they are ‘covered’ but actually have exposure to risk for their families. Their families will be worse off for 2-3 years (physical recovery and then financial recovery – to get back to where they were prior to the health event).

Protecting income has to be the biggest concern for families – without income the family starts to hurt very quickly. If you see yourself in any of these situations above, or you want to talk through your current insurance strategy with me, I’d be happy to help where I can.

Life Insurance for when life happens!

The post “It will never HAPPEN to me” first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

I don’t have a mortgage so I don’t need life insurance – right..?

Dom Bish — Wed, 29 Apr 2020 20:43:22 +0000

https://bolsterriskmanagement.com/

“I don’t have a mortgage so I don’t need life insurance – right..?”

The above is a sweeping face-value statement which, on the surface, may seem justified.. However… Is life insurance only to cover your debts if you kark it and end up on the pile of the no-tomorrows..?

Maybe, but maybe not. As with all things personal insurance, there are many factors, which effect people individually Here are a few reasons why

While life (death) is the insurance that most people think of first, it is by no means the only type of cover to consider. From here we can progress on two streams of thought; (a) what is the purpose of life insurance if you die? and (b) what are the financial risks to you should something happen that effects your ability to earn an income? These are not necessarily mutually exclusive questions – if you die, you income-earning ability stops!

There are a heap of other questions that feed from either stream, some overlapping, some taking us in seemingly random tangents. A good adviser will try to uncover as much as possible, asking many questions and painting many scenarios along the way. All in the hope of understanding what your key financial risks are so that an informed, logical and strategic recommendation can be made to their client.

2 examples – no mortgage – both have insurance

I have two examples below which may give pause for thought, neither case has a mortgage, yet both are exposed to financial risks.

Young, male, no mortgage, pays rent, good job – Mac (Auckland)

Let’s meet Mac (not his real name obviously), living in Auckland, renting with some friends in town. Mac has a good job and is moving along his career path in engineering. In his mid-twenties, he is not quite ready to buy a home yet his parents think that he should. He has a small amount of debt (less than $20,000) which he is paying off quite quickly.

Mac’s main concern is that something happens and he is not able to work anymore or earn an income. The last thing he wants is to be a burden on his parents, who are approaching retirement themselves.

If Mac dies:

Mac doesn’t have anyone that he would wish to bequeath money to. However, he wants his funeral paid for (and for his body to be repatriated back to Singapore). Mac also wants his debt repaid in full. The sum total of Mac’s life insurance would be less than $50,000.

If Mac is unable to work for 12 months due to illness:

Mac wants to still be able to live in his current accommodation. To do that though, he needs his rent and expenses covered. A monthly paying disability insurance product similar to income protection (or one of the variations) would help here.

If Mac is never able to work again, due to permanent disability:

Mac would still wish to purchase a property, even if it was a small unit or apartment. Having a lump-sum TPD (total and permanent disability) insurance to cover this expense would give him some independence, even though he would never work again in his occupation.

Single mum paying rent single household earner – Maggie (Napier)

Maggie’s turn to say hi. She has recently left her troubled and violent marriage with 3 kids in tow. One child has mild autism another has ADHD. Qualified and working full time, Maggie is keen to put her past behind her and move on with her life. She has been left with virtually nothing financially and so is on a fairly tight budget. That being said, she works in the health department and knows all to well how one’s health can suddenly change. Maggie wants a basic plan in place for a couple of years while she gets back on her feet financially. Then we will review her strategy and adjust what we can.

If Maggie dies:

The 3 children need looking after – therefore a fund is now in place that should Maggie die, the children will at least get through their school years.

If Maggie has a serious health condition or illness:

If something serious happens to Maggie’s health, such as an episode of breast cancer or a heart attack, she will have a lump-sum of money to keep her household running for up to two years while she recovers.

The banks… Who’s debt are they covering? What’s the bigger picture?

The banks have done a good job of perpetuating this impression by advising everyone who gets a mortgage to get life insurance to cover the debt. Of course much of the time they are focused on covering their own liability – the mortgage.

Personal insurance is more than just paying debt if you die, but that a one place to start. Thinking about your own situation, who stands to lose if something happens to you? Are you only thinking about death, or are you also thinking about the ‘living insurance’ – covering your loss of earnings. Speaking with an experienced adviser can help you to think more deeply about these and other types of situations.

If you want to know more about this type of product, or you are concerned about your own policy and whether it properly covers your risks, drop me a line – I’d love the opportunity to chat and walk through it all with you.

The post I don’t have a mortgage so I don’t need life insurance – right..? first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..