Life insurance can be tricky. People often feel like they don’t know enough about it and may be unsure where to start looking for information. This lack of education—along with other factors—may be leaving millions of Kiwis at risk for financial hardship.
Let’s take a look at underinsurance in New Zealand: what it is, why it happens and how you may be able to avoid it.
What is underinsurance?
The definition of underinsurance is fairly straight-forward: underinsurance is when an individual or family does not have enough insurance cover to offer them complete financial protection. In terms of life insurance, this may mean that families are left out of pocket for expenses after the loss of a breadwinner, and could face financial hardship as a result.
Underinsurance is a big issue for many Western nations, and New Zealand is no exception. One study estimated underinsurance in New Zealand at over $195 billion1 just for life insurance! This insurance gap affects people of all ages, income levels and ethnic groups, though women are more likely to be underinsured than men, according to this same study.
Why are people underinsured?
There are many reasons why people may not have enough life insurance cover. Difficulty thinking about what might happen to our loved ones if we were no longer able to provide for them often plays a role. This is a big stumbling block for many people, leading to procrastination or an unwillingness to purchase insurance in the first place.
When they do purchase, some people might be keen to “get it over with” as quickly as possible. They may not stop to consider how a life insurance benefit might be used by loved ones, and whether the amount of cover they’ve chosen is enough. Their estimate or guess could be too low as a result.
Ongoing discomfort with topics surrounding terminal illness or death can also lead people to take a “set it and forget it” attitude towards their life insurance policy. Over time, the benefit amount originally chosen may no longer fit their needs. Marriage, a new home, growing your family, work promotions and other events could mean increasing life insurance cover to provide better protection against financial hardship for your loved ones.
Other common causes of underinsurance are age (“I’m too young for life insurance”), lack of knowledge or understanding of available products, worries about cost (“Life insurance is too expensive”), or a belief that the government will provide enough financial backup.
How do I know if I have enough cover?
Choosing the right amount of cover for you and your family will depend on a number of factors. This could include things like your current salary, household budget, level of debt, or how many years the payout may need to last.
To help you start planning, here are a few ways your family might use a life insurance benefit if something were to happen to you:
- Mortgage payments – Either to allow loved ones to make payments for a set amount of time, or to pay the house off completely in one go. This could mean the difference between keeping the family home or needing to sell and move during what is already a difficult time.
- Car payments – Like the mortgage, this could mean the ability to make payments for a period of time, or to pay off any car loans all at once. Your family could have one less bill to worry about, so they can focus on what’s really important.
- Household bills – Utilities (electricity, water, phone, etc.), as well as day-to-day expenses, like groceries and petrol will still need to be paid, even while your family is grieving. Life insurance could help pay for these expenses while your partner takes time off work.
- School fees – A life insurance benefit could be used for public or private school fees. Your children could continue at the same schools, helping keep their normal routine during what is often a difficult time.
- Higher education fees – A child or spouse could pay university tuition, take courses to obtain a certification or supplement their income whilst completing an apprenticeship. The life insurance benefit could help them start or continue the lives you would want for them.
- Hospital bills or on-going medical expenses – Policies may pay a benefit if the insured is seriously injured or diagnosed with a terminal illness, helping you to pay large hospital bills, for on-going care or physical therapy. This could be especially helpful if you are unable to work permanently or temporarily, or if your partner needs to take time off work while you’re on the mend.
- Maintain their standard of living – Allow your family to keep living the lifestyle you’ve worked hard to provide them, with less worry about making ends meet.
- Funeral services – Help pay for a funeral service, burial fees or any other final debts after you’ve passed. This could keep your loved ones from going out of pocket on these expenses, or ‘reimburse’ them for bills that may need to be settled quickly.
Make the most of your policy
So what can families do to avoid being underinsured? A first step may be to review your current spending and budget. You might want to take into account other factors, such as if you’re a dual income household or how losing a stay-at-home parent might impact your finances. Even you and your spouse’s funeral wishes may be important to consider, as costs can vary widely based on the type of service you choose.
You may want to compare all this to your current life insurance policy, and consider if the amount of cover you have is enough to achieve what you hope it would, if the worst were to happen to you. It may be possible to increase your cover amount or add optional extras to meet any underinsurance gaps you might discover.
Disclaimer: The information provided in this article is of general nature, and does not take into account your personal situation. You should consider whether the information is appropriate to your needs or seek professional advice, where necessary.
All product information is correct at the time this article was published. For current product information, please visit the Momentum Life website.
1. Massey University, Exploring Underinsurance in New Zealand