We all know life insurance is about protecting you and your family financially, so if someone passes away unexpectedly, money concerns will be the last thing anyone has to worry about. That’s how life insurance should help, especially at such a difficult time. Yet, unfortunately, as with anything important, mistakes can be made. And tiny things can have dire consequences.
The perfect time to go may be when you’re super old, wonderfully wrinkly and surrounded by family and friends. Perhaps even sharing a joke, although death is near, knowing you are financially secure and your passing won’t cause money headaches for loved ones. That’s a curtain call for a life well-lived.
Some people are that lucky, but we can’t all count on such a happy ending. That’s why people take on life insurance; it’s a ‘just in case’ safety net. However, without a deep understanding of the details, getting life insurance in the first place may end up being a pointless gesture. If you really want your insurance to help your loved ones should someone pass away, there’s much more to consider than just the monthly costs. It’s worth getting things checked by an expert.
Advising you in the right direction is where our ‘non-aligned’ Financial Advisers help. They work in your best interests to make sure you don’t waste years of insurance payments and miss out on the payout you or your family need.
So, what mistakes do people often make?
Recently, over 50 independent Financial Advisers gave insuranceadvice.nz the answer to that question. Here are the top ten, in no special order.
Paying off the mortgage; tick. Funeral costs; tick. Before you pat yourself on the back, know these two things are probably not enough. What about other financial commitments? If not addressed when deciding on life insurance, you or your significant other could be in a real pickle if one of you passes away – especially if you have children.
These little people can create lots of other costs that are invisible until a tragedy strikes. For example, often one partner works while the other looks after the children (or works part-time rather than full-time). Would your spouse be able to afford to stay at home and look after the children if you died? If you normally work full-time, would you be able to give up work to spend more time at home? If you stayed working full-time, would you have enough money to spend on childcare?
Giving up work or giving up all your time to look after the family may be extremely unappealing. So, ensuring there’s enough insurance cover to avoid making any big sacrifices is important.
Many people living together with children don’t understand the need to insure both partners. They mistakenly think that only the partner working needs to be insured, but this ignores the effect of the death on the non-working partner. The non-working partner may have to go to work to cover everyday costs, which creates further costs in childcare.
This is another common error. If you have a limited insurance budget, you may find that by reducing your life cover, the money saved could be used to fund (or partially fund) some other disability or health cover.
Kiwi advisers noted this as one of the most common mistakes they saw. People often assume that life insurance is a commodity with price as the main driver. However, life insurance is like any other product, and quality plays an important role.
It pays to take a bit of time to understand the options and variables before making a decision. Know that you are buying quality insurance. Have our advisers tell you about the insurer they are recommending.
All types of insurance have what are known as ‘riders’. These are additional provisions related to the cover that kick in if a particular condition is met. For example, most life covers include a terminal illness clause. The clause may provide for a full or partial payout of the policy if the insured person is diagnosed as having a terminal illness and is likely to die within a specified period – 12 months, for instance.
Another example of a rider is cover buyback. This could be where you have taken out an accelerated disability cover linked to your life policy, or perhaps there are automatic increase entitlements for special life events such as having a child. Check out our Knowledge Centre post for more on this.
People often make the mistake of not keeping their estate plans up to date. This is a huge error because your estate could end up in the wrong hands completely. There have been many horror stories about this.
When it comes to life insurance, keeping your estate plans current goes hand in hand with policy ownership and ensuring that your Will is recent. It’s crucial so that life insurance proceeds end up where you want them. That’s key to the success of any insurance policy. Did you know, for example, that a Will made before marriage is no longer valid after you get married unless it specifically states that it was drawn up in anticipation of that marriage?
Make sure you take the opportunity to review your estate planning provisions EVERY TIME you make a change in your life insurance.
Failure to declare a health condition at the time of application can mean that the insurer has the right to void the policy. This means that even though you may end up paying for cover for years, the end result is that the insurer can refuse to payout. For you, that’s a big waste of money over the years, and no claim money when you really need it.
The insurance company may even refuse to pay out if the health condition had nothing to do with your death.
If you are unsure about whether to mention something in your application, the best approach is to declare it and let the insurer determine whether it is important or not.
Have you read the terms of your life cover? If you have ‘free’ or especially cheap cover in place, it is quite possible that it pays out as a result of death by accident only.
Statistics suggest that of the average 33,000 deaths in NZ over a year, only an average of 1,900 are through accidental death. Therefore, the likelihood of a payout from your accidental death cover is slim!
Do you know who would receive the proceeds of your life insurance if you were to pass away? Do you know when they would receive it?
If the policy is in your name, the proceeds would go to your estate to be distributed under the terms of your Will. Or if you die without a Will, under the provisions of the Wills Act 2007. This typically means a delay before your loved ones receive the proceeds of your life cover.
If you are in a second or third marriage, you may find that children from an earlier marriage may be able to claim some entitlement. Also, if you have a family trust, it may be appropriate to assign the policy to the trust if the trust’s beneficiaries are also the beneficiaries of your Will.
Ensuring the policy is owned appropriately is key to ensuring that your life insurance payout gets into the right hands when needed.
Many advisers notice that people treat life insurance as a ‘set and forget’ purchase, as though once it’s in place, there’s no need to look at it again. However, as you get older and your circumstances change, your insurance must too.
Significant life events, such as starting a family, having another child, moving house, marriage, divorce or when the children leave home, are all important times to re-assess your life insurance provisions. Your policy needs to be relevant in the context of your changed situation.
At the very least, you should review your cover every couple of years and assess against your current estate planning provisions. Don’t let your policy payments end up a waste of time, irrelevant, or with the wrong people benefiting.
If you’d like free professional help from one of our Financial Advisers, call us on 09 307 9300. We can arrange an online meeting or a time after lockdown to look at this. After all, if you’re going to get life insurance to protect your loved ones, you may as well do it properly. It’s worth getting someone to help point you in the right direction.
There are many factors to consider when setting up an effective life insurance policy that will pay out what you need when you need it. If it doesn’t do that, there’s really no point in having it.
Adapted by Darryl Scott (with permission) from an article published by Financial Advice New Zealand in June 2018 https://financialadvice.nz/2018/06/21/life-insurance-mistakes/
