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10 May 2021

The need for insurance

I just thought it was an opportune time to outline why it’s important to have adequate insurance cover in relation to life, income protection and health.
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I just thought it was an opportune time to outline why it’s important to have adequate insurance cover in relation to life, income protection and health.

I am sure you do not need to be convinced that people die prematurely and become disabled. Of course, when these things happen there is an immediate impact on personal finances.

I will just outline broadly why I would advise you to have these covers and when you no longer require them.

Life Insurance

The main reason to have life insurance is for a surviving spouse to be able to clear any debt and also to have a level of replacement income for a period of around 5 years until such time as the youngest child is at school and the spouse is back on their feet emotionally and financially. For example, if the mortgage is $1,500,000 and household outgoings are $100,000/year one would be advised to take out life cover for $2,000,000. Life insurance can be owned by the life insured and there can be a separate owner such as the spouse. The advantage of a spouse owning a policy is that in the event of one’s untimely death the spouse need only present the policy document and death certificate to the insurance company for the proceeds to be paid out. Should the life insured own their policy the proceeds then form part of their estate and are subject to probate. When debt is paid down and children are no longer dependant life insurance levels can be adjusted down however one thing to keep in mind is what is the position for your spouse in terms of retirement planning should you die prematurely. On this basis there may be a good reason to keep a level of cover in force. There are 2 main premium options those being stepped (rate for age) and level to a certain age (i.e. 65). Rate for age premiums are initially lower and better value than level however these do increase each year and become expensive when you get into your late 50’s and 60’s. Hopefully if you have stepped premiums you have sufficient financial assets that you are in a position to either cancel or reduce your life insurance. On this basis level premiums have their place. One can also opt for a level of cover on stepped premiums and a portion of cover on level premiums.


Income Protection Insurance

I call this selfish insurance as it pays you most of your income should you become disabled and unable to perform the usual duties of your job. I am sure you do not need any reminder of this given your work environment. Your lifestyle (unless you have substantial financial assets) depends on your ability to generate ongoing income. In your job as a medical profession, you are solely responsible for generating income. Income protection pays the majority of your income should you become disabled through sickness or accident. In the case of accident ACC will provide a maximum weekly benefit of $2,066 so if your net income is higher than this income protection cover will pick up the difference assuming your benefit is higher than the gross amount of this income. In the case of sickness income protection will pay out the entire balance should you be disabled and unable to work. Income protection pays out after a stand down or waiting period and as the DHB cover you for 3 months in a Consultant role you need only set your waiting period at this time. Income protection policies also pay a hospitalisation benefit for every day you are in hospital after the 3rd day. This benefit is payable up to 90 days. In addition, if you have been totally disabled for 2 weeks if you are still partially disabled after the waiting period you can still claim for a partial benefit. An income protection policy can cover you up to age 65 or 70 and may be sufficient to allow you to save for your retirement which would be very useful if you are unable to return to the work force.


Health Insurance

This type of cover will provide a base cover which provides cover for surgical and non-surgical treatments in a private hospital. Add on’s to this cover include a specialist option, GP option and Dental and Optical option. Health insurance provides peace of mind that if you need surgery for example, you do not have to wait on a hospital list and can have your operation performed in a timely manner. This is especially helpful if you are in pain or discomfort. Premiums can be kept in check by just taking base cover and also opting for a higher excess such as $1,000, $2,000 or $4,000. In my view add on’s such as specialist visits and GP visits are dollar swapping at best as the additional premiums generally will be greater than any claims on an ongoing basis.

To summarise insurance has its place and in my view is a prudent area to address in one’s personal financial planning. It is important to review it on a yearly basis and make any changes that are appropriate.