Building wealth is one thing, but knowing how to protect your financial plan is just as important. From unexpected illness and loss of income to rising insurance costs, having the right protections in place can make all the difference between staying on track and watching years of financial progress unravel.
Why Protecting Your Financial Plan Matters
When it comes to financial planning, most New Zealanders spend their time thinking about the exciting stuff: buying a home, growing investments, paying down debt and working towards retirement.
But there’s another part of the equation that often gets overlooked: how to protect your financial plan when life doesn’t go according to plan.
A well-rounded financial strategy has three key components:
- Plan: Establishing your financial goals, including the home you want to live in, the lifestyle you want to enjoy, when you’d like to retire and what you hope to leave behind for your family.
- Grow: Working towards those goals through investments, property, KiwiSaver, debt repayment and managing your household budget.
- Protect: Putting safeguards in place so unexpected financial setbacks don’t undo the progress you’ve worked hard to achieve.
One of the biggest risks people underestimate is the value of their future income.
Consider someone earning $80,000 a year at age 35, with another 30 years of work ahead of them. That’s potentially $2.4 million in future earnings, without factoring in any salary increases.
For many New Zealanders, their ability to earn an income is their single biggest financial asset, yet it’s often one of the least protected.
While ACC provides support for certain accidents and injuries, there are plenty of circumstances where someone could become unable to work without qualifying for that support.
That’s why financial protection needs to be considered alongside wealth creation, rather than something to think about only when things go wrong.
1. Build an Emergency Fund to Protect Your Financial Plan
An emergency fund is your first line of defence against unexpected financial setbacks.
Whether it’s losing your job, facing an unexpected expense or needing time away from work, having accessible savings can prevent a temporary setback from turning into a much bigger financial problem.
At Lighthouse Financial, we generally recommend having at least three to six months of household expenses set aside in an emergency fund.
That money could be held in cash savings, a cash-type fund or an offset or flexible facility against your owner-occupied mortgage.
The important thing is that the money is accessible when you need it.
Why Your Share Portfolio Isn’t an Emergency Fund
One common mistake is relying on investments, particularly shares, as an emergency fund.
While shares can play an important role in building long-term wealth, their value can fluctuate significantly.
Imagine you’ve set aside $30,000 in shares for emergencies. If the share market falls by 30%, that investment could suddenly be worth just $21,000.
If you happen to lose your job at the same time, you could be forced to sell investments at a substantial loss simply to cover your living expenses.
An emergency fund serves a different purpose from your investment portfolio.
Your investments are there to grow your wealth. Your emergency fund is there to preserve it.
Having that financial buffer can also help keep insurance premiums more manageable, as you may be able to cover a short period without income before needing to rely on an income protection policy.
2. Get Your Wills and Estate Planning Sorted
Estate planning is another important part of protecting your financial future, yet it’s something many New Zealanders continually put off.
As highlighted in the discussion, around half of Kiwis don’t have a will, and even those who do may not have reviewed it for 10 or 20 years.
The problem is that your circumstances can change considerably over that time.
Your financial position, assets, family circumstances and wishes for how your estate should be managed may look completely different from when your will was first prepared.
The Hidden Cost of Getting Estate Planning Wrong
It’s tempting to look for the cheapest way to prepare a will, particularly when there are low-cost services available.
However, the upfront cost isn’t necessarily the most important consideration.
One example shared was of a family whose grandmother had arranged her will through a well-known provider. Following her death, the family struggled to access the money she had intended to leave behind.
Over time, ongoing fees reduced the amount available to her children and grandchildren.
What initially appeared to be a straightforward arrangement ultimately had significant financial consequences for the family.
It’s an important reminder to understand the terms of any estate planning arrangement, including potential fees and how your assets will be managed.
Wills and enduring powers of attorney are important documents to have properly prepared, rather than simply ticking them off a to-do list.
Seeking professional legal assistance upfront may involve a cost, but getting these arrangements wrong can prove considerably more expensive in the long run.
3. Understand the Different Types of Insurance
Insurance isn’t particularly exciting, and with household budgets already under pressure, it’s understandable that many people question whether the premiums are worth paying.
But the purpose of insurance isn’t necessarily to get your money’s worth through claims.
Ideally, you’ll never need to use it.
Instead, insurance is about transferring financial risks that you couldn’t comfortably manage yourself.
There are four main types of personal insurance worth understanding.
Life Insurance
Life insurance provides a lump-sum payment upon death.
For households with significant debt, a mortgage or financially dependent children, this can be particularly important.
If one partner passes away, the surviving partner may suddenly be responsible for the mortgage, household expenses and raising children on a single income.
Life insurance can help reduce that financial pressure by providing money to repay debt or support the household.
Income Protection Insurance
Income protection insurance provides regular payments if illness or certain medical conditions prevent you from working, subject to the policy’s terms.
While ACC can provide support following qualifying accidents and injuries, it doesn’t cover every reason someone might be unable to earn an income.
Conditions such as cancer, heart attacks, strokes and mental health issues can have a significant impact on someone’s ability to work.
Income protection helps address the financial consequences of losing that earning capacity.
Importantly, you don’t necessarily need to insure your entire income or maintain cover all the way through to age 65.
There are different ways to structure a policy that can help make premiums more affordable.
Trauma Insurance
Trauma insurance provides a lump-sum payment following a qualifying serious medical diagnosis or event.
Cancer, heart attacks and strokes are among the most common claims associated with this type of cover.
Unlike income protection, which provides ongoing payments, trauma insurance can provide an immediate injection of cash.
That money could help cover treatment costs, support the household while someone takes unpaid leave or simply provide some financial breathing room during a difficult period.
Health Insurance
New Zealand’s public healthcare system provides access to hospital treatment, particularly for acute medical emergencies.
However, non-emergency treatment and certain medical procedures can present different challenges.
Health insurance can provide additional options for treatment, including procedures such as hip replacements and access to certain medications.
While health insurance can be valuable, it isn’t necessarily the first priority when deciding how to allocate a limited insurance budget.
The key is understanding which financial risks would have the greatest impact on your household and prioritising your cover accordingly.
4. How Much Insurance Do You Actually Need?
One of the biggest misconceptions about insurance is that more cover automatically means better protection.
In reality, people can be both underinsured and overinsured.
Someone with a large mortgage, young children and significant household expenses may have a very different insurance requirement from someone who is debt-free, financially independent and has no dependants.
Determining the right level of cover involves looking at your broader financial circumstances.
Some of the key questions include:
- How much debt would need to be repaid if you or your partner passed away?
- How much income would your household lose?
- What are your ongoing household expenses?
- What standard of living would you want your family to maintain?
- Could certain financial goals or planned purchases be adjusted if circumstances changed?
For example, a family planning to purchase a $500,000 bach might need additional life insurance to maintain that goal if one partner passed away.
Alternatively, they might decide that purchasing the bach would no longer be a priority in those circumstances.
Both approaches could be reasonable, depending on the family’s goals.
What If You Could Just Sell an Investment Property?
Some people assume they could simply sell an investment property if they needed access to money following a major life event.
But selling property takes time, and market conditions aren’t always favourable.
If property prices have fallen significantly, selling quickly could mean accepting a substantial loss.
In some circumstances, a smaller amount of life or trauma insurance could provide enough financial breathing room to allow a family to sell an asset over a more manageable timeframe.
The goal isn’t always to insure against every possible expense. Sometimes it’s about having enough protection to give yourself options.
5. How to Make Insurance More Affordable
For many households, the biggest barrier to insurance isn’t understanding its importance. It’s finding room in the budget to pay for it.
However, insurance doesn’t have to be an all-or-nothing decision.
A comprehensive package covering every potential risk might offer extensive protection, but the premiums may be difficult to justify alongside other financial commitments.
A more practical approach can be to start by identifying the events that would cause the greatest financial disruption.
For a family with young children and a mortgage, that might mean prioritising life and trauma insurance, followed by a more affordable level of income protection.
Health insurance might then be considered if the budget allows.
There are also adjustments that can be made to certain policies, such as reducing the amount of income insured or changing how long cover remains in place.
Having an emergency fund can provide another layer of flexibility.
Rather than paying for the most comprehensive policy available, the aim is to balance the level of protection with what you can realistically afford.
Having some appropriate protection in place can be considerably better than leaving your family completely exposed while waiting until you can afford the perfect policy.
6. Why Getting Insurance While You're Young Matters
It’s easy to assume that insurance is something to think about later in life, particularly when you’re young, healthy and haven’t experienced any major medical issues.
But waiting until something goes wrong can make obtaining insurance considerably more difficult.
When applying for insurance, providers assess your medical history and the risks associated with offering you cover.
Existing medical conditions can result in exclusions, where certain conditions aren’t covered, or premium loadings, where you’re charged more because of the additional risk.
In some circumstances, insurers may offer different terms depending on your medical history.
This is why arranging cover earlier can be beneficial.
It also highlights the importance of working with an insurance adviser who can help compare providers and assess the terms being offered.
An exclusion doesn’t necessarily mean a policy has no value. There may still be a wide range of other conditions and events covered.
Understanding exactly what you’re paying for, and what protection you’re receiving, is an important part of making an informed decision.
7. Why You Should Regularly Review Your Insurance
Putting insurance in place is an important first step, but that doesn’t mean the same policy will remain appropriate for the next 10 or 20 years.
Your financial circumstances are constantly changing.
You might pay off your mortgage, build up investments, become financially independent or reach a point where your children are no longer financially dependent on you.
As those changes occur, the level of insurance you need may also change.
One example involved a client paying approximately $1,500 a month in insurance premiums.
The cover had originally been arranged when the family had a substantial mortgage and two young children.
Years later, the mortgage had been repaid and the children had grown up, but the insurance arrangements hadn’t been adjusted to reflect their new circumstances.
That’s a considerable monthly expense for cover that may no longer align with the family’s financial needs.
Reviewing insurance isn’t always about increasing cover or purchasing additional products.
Sometimes it’s about reducing unnecessary protection, reassessing premiums or making sure the quality and terms of an existing policy remain appropriate.
Any decision to change providers should also consider the potential risks of moving, particularly where new exclusions or different policy terms could apply.
Just as you might review your mortgage structure or investment strategy over time, your insurance should evolve alongside your financial plan.
Key Takeaways
- Protect your income: Your future earning capacity could be your biggest financial asset, so consider what would happen if you were suddenly unable to work.
- Build an emergency fund: Aim to have three to six months of household expenses available for unexpected financial setbacks.
- Keep estate planning up to date: Make sure your will and enduring powers of attorney reflect your current circumstances and wishes.
- Understand your insurance options: Life, income protection, trauma and health insurance serve different purposes, and not every household needs the same combination.
- Prioritise the biggest risks: Focus on the events that would have the greatest financial impact, rather than automatically choosing the most comprehensive cover.
- Don’t wait until something goes wrong: Arranging insurance while you’re healthy may help avoid exclusions or higher premiums associated with future medical conditions.
- Review your cover regularly: As your mortgage, family responsibilities and financial position change, your insurance requirements may change too.
Next Steps
If you’re unsure whether your emergency fund, insurance or estate planning arrangements are doing enough to protect your financial future, get in touch with the team at Lighthouse Financial to review your options and make sure your financial plan has the right foundations in place.
If you’d like to watch more, check out this episode below.
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Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
