Not that thrilling…
…but utterly critical. No one will argue that insurance is super-exciting, and a list entitled “ways to spend my money other than on insurance” would be a long one indeed. But, simply put: insurance is an integral part of any financial plan. Because? Because the risks of not carrying insurance are simply too great.
But where do you start? It’s easy to make mistakes when buying insurance coverage – especially if you’re a bit new to all this – mistakes that can result in the loss of your assets or create an unnecessary burden on your monthly expenses. And we’ll be direct here: if you die unexpectedly, and you do not have your financial affairs in order, that burden becomes your family’s.
Taking the time to think through your requirements now, will save many weeks, months and sometimes years of pain, in the future. We reckon that’s reason enough to start a discussion. So that’s what we’re doing, beginning with a few simple bits of information that can really help you avoid those pitfalls, come up smiling and say, didn’t I do well? Yes, you did!
Many of these mistakes we discuss below may be applied across all insurance types. However, the focus here is on personal insurance, such as life, trauma, and disability cover.
Avoid these common mistakes when you’re shopping for insurance:
1. Failing to Shop Around
Companies use a bunch of different equations and calculations to determine client premiums. Some insurers will have more faith in someone of your demographic and risk profile than others. Shop around before you make a decision. It might be the most lucrative time you spend this year. With personal insurance, there are many options to consider. Use a registered financial adviser, who can look at different companies on your behalf, to guide you through that process.
2. Ignoring the importance of long-term care or disability insurance
This type of policy can take a significant bite out of your finances, but it is insurance that most people eventually need. Long-term care is expensive, but crucial. If your budget is limited (and that’s most of us) it’s possible to limit the policy to a two or five-year period to cut your premium.
3. Purchasing an inadequate amount of insurance – or too much
There are some old-school brokers still around who will encourage you to buy perhaps more cover than you should. Sometimes they’re right – bitter experience tells us that purchasing too little coverage is a bigger mistake than purchasing too much. However, purchasing too much will result in a larger expense than necessary. So, what do I do?! Exactly. A good financial adviser will help you find the sweet spot.
4. Unknowingly leaving some financial risks uninsured
Covering your debt and income are two obvious risks to insure. However, what are the future needs of you and your family? Do you have risks that might not be covered? It’s important to ensure that you have at least considered all worst-case scenarios, so that you have comfort in what is covered.
5. Not Updating Coverage
Everyone’s needs change over time. Your insurance coverage should change over time, too. Companies can also change their pricing structure. A “great deal” this year might not be as competitive next year. Re-evaluate your needs annually and after any major life event.
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6. Choosing a low premium structure for your risk strategy
Choosing to “share the risk” with the insurance company is a great way of minimising your monthly costs. However, be sure that you have a financial ‘buffer’ at hand, so that when that unfortunate event does happen, you are not left short. Any savings that you make on the premium should be added into your emergency savings account so that you can be prepared.
7. Buying coverage without background checking the provider
A quick internet reference check can save you a lot of grief. While you’ll always have to filter “review” information, if there are a lot of complaints regarding refused claims or slow response on an insurer you’re looking at, look somewhere else. Lowest price isn’t always the best option, and price shouldn’t be the only factor you take into consideration when buying. Do your homework. Again, this is something that a good financial adviser should be able to help you with.
8. Check your adviser’s motivations
While there are, in the majority, highly ethical agents that would never sell an unnecessary policy, many insurance brokers are focused on the bottom line. Their bottom line. Double-check the information and advice that your agent provides. Use an agent that you can trust, especially one that you think is in for a long-term client relationship. To be fair, in New Zealand, the recent regulations from the FMA (Financial Markets Authority) are rightly making it harder for the ‘quick-sell, slick insurance’ transactions to take place, ensuring the key focus is on developing the client relationships.
Some final thoughts
The thought of insurance can be daunting, and going through it in detail can seem confusing. But insurance provides you with fundamental, critical security. Most of us simply don’t have the financial resources to replace our home or our car, or pay large medical bills when unexpected events strike.
Insurance is a way of protecting your assets and your future.
Insurance coverage will take a portion of your monthly income – and you can decide what that proportion is – but it really is money well spent. How much it costs depends on individual circumstances.
In Australia and New Zealand, we know that many policies will cost 3-6% of the gross household income. This is not a hard and fast rule, but it does give you an indication and benchmark for financial security. Without that security, it is very difficult to plan effectively for the future, especially for retirement. If you have to spend years recovering from a financial loss due to sickness or ill health, those years are compromising, not enhancing your retirement.
And we think that’s reason enough to have “that insurance conversation.” Talk to us, or your financial adviser; we’re here to help.