Think you're too young for life insurance?
In association with Kiwibank
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Bad things happen to nice people. And that person just might be you. Brenda Ward talks to the experts about why paying for insurance might help you sleep more soundly at night.
Most people think insurance is about having your car replaced when it’s stolen, getting a big payday when you fall sick, or what happens after you’ve passed away.
Yes, it can be all that – but insurance is also about managing your financial risk, says Massey University’s Dr Mike Naylor.
His department, the School of Economics and Finance, found that Kiwis are among the most underinsured people in the OECD countries, when it did a study for the Financial Services Council. And that’s a worry.
“Insufficient insurance means there is insufficient protection against adverse financial events,” the study said.
As a nation, we’re good at insuring possessions, but not ourselves. The study found that people will be happy to insure a $15,000 car, but often fail to insure their earnings potential, which could add up to several million dollars.
For example, your investment strategy could be wiped out overnight by illness or injury, says Naylor.
“Everyone thinks you’ll work till you’re 65, you’ll save a certain amount of money for retirement. And yes, a number of people do.
“But some get to fifty, have a stroke – and they’ll never work again. Their whole investment plans are gone. You have to sit down and work through a number of scenarios.
“If your back is broken, and you have to live in bed, what would you do? How would your life continue?”
The FSC/Massey survey showed that New Zealanders have low levels of personal risk insurance, especially income, trauma, and total and permanent disability insurance. In fact, disability is statistically more likely than death in their working lifetime, says Naylor.
“Our larger finding was that we have high rates of mis-insurance – people’s sums do not correspond to needs. This particularly applies to life insurance. Our life cover rates are appropriate, but cover sums do not relate to needs.”
This puts more costs on our social welfare and health systems, costing us all more in taxes.
Too young to insure?
There’s a real problem with young people not understanding the value of life insurance, says Kiwibank Digital Delivery Analyst Callum McPhail. He was part of a Kiwibank FinTech Accelerator team exploring the reasons why people his age, in their 20s and 30s, don’t get insurance.
The project expected to find that younger customers were finding issues with online forms, says McPhail. But no.
“The problem was even before they got to the application,” he says. “There was a breakdown in their not seeing a need for insurance – or knowing that they had a need for it, but never doing anything about it. They never found the time.”
Those from 25 to 33 thought insurance was for older people, not for them.
Digging deeper, many young people thought if they were injured and couldn’t work, ACC, social welfare, and the ‘Bank of Mum and Dad’ would care for them. Others didn’t trust insurance companies to keep their word.
Some already had health issues and thought they’d be declined. Some thought they wanted $1 million worth of cover when they only needed $100,000.
“But while you’re young, the payments are very low,” says McPhail. “Your risk of dying is much lower. The benefit of going in now is that if you develop any medical conditions, you’re covered, but if you wait until you’re thirty to thirty-five, and a medical condition knocks you out, you’re not going to be covered for it.”
The team also found, for young customers, that it isn’t about online forms – many people really need to address their concerns by talking to an expert.
It’s your earnings that count
Insurance pioneer Naomi Ballantyne says people of all ages misunderstand insurance.
“It’s not about dying; it’s about living,” she says. “It’s all about protecting income. Insurance is to provide this security if something affects your ability to generate an income.
“It gets you to the same place after your ability to earn an income has been interrupted. The goal is to put you back to where you would have been.”
She says if you’re injured or ill and can’t work, your partner may be caring for you and can’t work either. There are increased costs, you can’t take your family on holidays and you can’t afford to put your children through university.
She says: “Givealittle is full of people who didn’t do anything to prepare. The others you don’t hear about – they had insurance, and it’s done the thing it was meant to do.”
McPhail agrees. The Givealittle community pitched in to help one young man financially.
“But the knock-on effect from that was that he couldn’t be seen out having a glass of wine, because people would say, ‘I thought they were in hardship’.”
Naylor says personal risk insurance is more than buying insurance – it’s about taking steps to lower your risk and better survive an adverse event.
No one likes to talk about death or disability, says Naylor, and this means they’re not protecting themselves, their families and their investments. But their cars are all right.