We explore the various types of insurance, including life, income protection, trauma, and health insurance, discussing what each covers and why they are vital for financial security. Whether you’re new to insurance or reassessing your current policies, this episode provides valuable insights to help you make informed decisions.
What is Personal Insurance and Why It’s Important
• Personal insurance is designed to protect individuals and their families from financial hardship due to unforeseen events.
• There is a difference between personal and general insurance. Personal insurance covers individuals, while general insurance covers property and liability.
Underinsurance in New Zealand
• Many New Zealanders are underinsured. Approximately 54% have inadequate life insurance coverage, which can lead to significant financial hardship, especially since half of the population would experience a 40% income drop if the primary earner were to pass away.
• Nearly 70% of New Zealanders lack health insurance, relying solely on the public health system, which can result in long wait times and uncertainty.
• Over-reliance on government support can leave individuals and families vulnerable, as government benefits may not be sufficient to maintain their lifestyle.
Overview of Main Types of Personal Insurance
• Life Insurance: Provides financial protection to beneficiaries upon the policyholder’s death.
• Income Protection Insurance: Replaces a portion of income if the policyholder is unable to work due to illness or injury.
• Trauma Insurance: Provides a lump sum payment upon diagnosis of a specified serious illness.
• Health Insurance: Covers medical expenses, allowing access to private healthcare services and avoiding long public hospital wait times.
Role of Insurance in Financial Planning and Risk Management
• Insurance is crucial for protecting wealth and ensuring financial stability.
• While many focus on growing their wealth, protecting it through insurance is equally important.
• Insurance might seem like a waste of money until an unexpected event occurs, highlighting its value.
Life Insurance
What It Covers:
•Death Benefit: A lump sum payment to beneficiaries to cover funeral expenses, outstanding debts, and daily living expenses.
•Terminal Illness: Some policies offer early payouts if the policyholder is diagnosed with a terminal illness.
Who Needs It:
•Individuals with Dependents: Provides financial stability for dependents who rely on your income.
•Homeowners: Covers mortgage payments and prevents the loss of the family home.
•Business Owners: Covers business debts and ensures business continuity.
How It Works:
•The policyholder pays regular premiums to the insurer. In return, the insurer pays a death benefit to the beneficiaries if the policyholder dies during the policy term. The benefit amount and terms are specified in the insurance contract.
Case Study:
•An Auckland mum was diagnosed with terminal cancer just weeks after canceling her life insurance policy, highlighting the importance of maintaining coverage.
Income Protection Insurance
Importance:
•Replaces a portion of income during illness or injury, ensuring financial stability.
Key Features:
•Income Replacement: Typically covers 75-80% of pre-tax income.
•Waiting Period: Time before benefits start (e.g., 13 weeks).
•Benefit Period: Maximum time to receive payments (e.g., 2 years, 5 years, or up to retirement age).
Who Needs It:
•Employees, self-employed individuals, and those without significant savings.
Personal Story:
•A policyholder with a chronic condition found income protection crucial for covering living expenses and maintaining financial security.
Trauma Insurance
Coverage:
•Provides a lump sum payment for serious illnesses such as cancer, heart attack, and stroke.
Financial Support:
•The lump sum can be used for medical treatment not covered by health insurance, rehabilitation and recovery costs, mortgage payments, and daily living expenses.
Health Insurance
Types:
•Hospital Cover: Covers treatment and accommodation in private hospitals.
•Specialist Cover: Pays for consultations with specialists and diagnostic tests.
•Comprehensive Cover: Includes hospital and specialist cover, and may cover GP visits, prescription medications, and other health services.
Benefits:
•Faster access to treatment, avoiding long wait times in the public health system.
•Choice of specialists and hospitals, giving greater control over who treats you and where.
•Access to advanced medical treatments not available in the public system.
•Wait Times: Long public hospital wait times emphasise the benefits of private health cover. For instance, in the three months to December 2023, 37% of patients had been waiting more than four months to see a specialist, and 40% had waited more than four months for surgery or other treatments.
Common Myths
•Myth #1: “I Don’t Need Insurance Because I’m Young and Healthy.”
•Even young, healthy individuals can experience accidents or sudden illnesses. Insurance provides a safety net regardless of age or current health status.
•Myth #2: “Insurance Is Too Expensive.”
•Costs can be tailored to fit budgets by adjusting coverage, waiting periods, and benefit periods. The financial protection offered can far outweigh premium costs.
• Myth #3: “Government Benefits Will Be Enough.”
•Government assistance is often insufficient to maintain lifestyle and cover all expenses. For instance, accommodation supplements range from $13 to $168 per week, which may not cover all living costs.
Frequently Asked Questions
•FAQ #1: How Do I Determine How Much Life Insurance I Need?
•Consider financial obligations such as mortgage, debts, children’s education, and living expenses. A financial advisor can help calculate an appropriate coverage amount.
•FAQ #2: What Is the Difference Between Income Protection and Trauma Insurance?
•Income protection replaces income during illness or injury, while trauma insurance provides a lump sum for critical illnesses.
•FAQ #3: Can I Have Multiple Insurance Policies?
•Yes, multiple policies can cover different needs. It’s essential to review your overall coverage to avoid gaps and overlaps.
•Assess Your Financial Situation: Understand your current financial obligations and future needs, including debts, dependents, and lifestyle expenses.
•Compare Policies: Shop around and compare policies from different insurers. Look at coverage options, premium costs, exclusions, and benefit periods.
•Seek Professional Advice: Consult with a financial advisor or insurance broker who can provide personalised recommendations based on your situation.
•Regularly Review Your Coverage: Life changes, such as marriage, having children, or buying a home, may require adjustments to your insurance coverage. Regularly review and update your policies to ensure they meet your needs.
Personal insurance is a crucial component of financial planning, providing protection and peace of mind. Understanding the different types of insurance available in New Zealand and regularly reviewing your policies can ensure you and your loved ones are adequately protected.
Key Takeaways:
1.Personal insurance is essential for financial stability, offering protection and peace of mind for you and your loved ones.
2.Understanding the different types of insurance can help you make informed decisions about the coverage you need.
3.Regularly reviewing your insurance policies and consulting with a financial advisor ensures your coverage remains appropriate as your circumstances change.
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.
