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Insurance

Insurance is an important part of managing your money matters. It’s a way to protect yourself against an unexpected financial loss. 

If you have a mortgage, children or a car it’s generally wise to have some sort of insurance security so if things go wrong, you’ve got help to keep your head above water financially. 

What insurance do you need?
Types of insurance
8 rules of insurance

What insurance do you need?


Common reasons you may need to buy insurance are to:

  • protect your assets, for example, home, contents and car
  • protect your income in the event of illness
  • pay off the mortgage if you die
  • provide some money for your family if you die
  • cover medical expenses if you get sick.

You probably need some form of insurance, but not everyone needs all these different kinds.

How much insurance you need will depend on your own particular circumstances and attitudes.  It is very easy to buy too much insurance and just as easy to not buy enough.

So when you consider getting insurance you need to weigh up what the risks of not having the insurance are against the costs of buying it. Ask yourself these four questions:

  1. What is the risk you would be insuring against? This could be death, or a fire in your home or your car getting stolen. Or getting sick and not being able to work.
  2. What are the chances of the risk occurring? Fire in the home is probably small, but will cost a lot if it happens. Damaging your car or having it stolen is relatively high, but the costs may not be as great as losing your home.
  3. What would happen if the risk occurred? If you died, your family would incur funeral and legal expenses and whatever income you earned would be lost (not to mention the emotional trauma). If a fire occurred in your home what could you lose - for example, the house if you own it, the contents?
  4. How much would it cost if the risk occurred? Would you have enough money saved to cover this and would you want to dip into these savings? You might even have to rent somewhere else while your home is repaired.

If you cannot or do not want to afford the consequences of the risk, then you should consider getting insurance.

Find out more in our 8 rules of insurance.

 

Types of insurance

There is a huge range of insurance products available. Here’s a brief outline of some of the most common products:

Life insurance
Level term insurance

Pays out on the death of the life insured. 
The cover usually lasts for a number of years (say 5 or 10) or to a specified age (say 65). The premiums can be level for the entire period of cover or for periods of years – say five years at a time.
Yearly renewable term  Similar to level term insurance except the premium is recalculated on a regular basis (normally each year).
Total and permanent disablement  You can sometimes add total and permanent disablement cover to a term life insurance cover. This will pay out if you suffer a serious illness (or following a bad accident) that means you will never work again.
Mortgage protection  Similar to level term insurance. Pays out enough on your death to cover the amount of your mortgage. With some policies the sum insured decreases as your mortgage reduces, so you don’t have unnecessary cover.
Loan protection  Similar to mortgage protection but designed to cover smaller personal loans.
Other types  There are many other types of life insurance – for example endowment, ‘whole of life’, key man cover.
General Insurance
Motor vehicle insurance 

This will depend on the type of cover you get. Regardless of the cover you buy, you normally only get what the car was actually worth at claim time.
‘Third party’ only covers damage to other people’s cars or property.
‘Third party, fire and theft’ extends that and is a common lower cost option. 
‘Comprehensive’ cover provides the greatest protection.
Home insurance  Covers fire and other property damage. It can cover full ‘replacement’ or can be ‘indemnity’ – just covering the insured value at the time.
Contents  Can cover theft, water damage, fire, etc.
Travel  Covers disruption, baggage loss, money theft.
Boat  Covers theft, fire, sinking.
Health insurance
Major medical  Covers you for operations and major hospital care. It may also cover the cost of specialists’ fees associated with hospital care. You can usually add other specialists’ fees to this type of cover.

Comprehensive 

 

 This can potentially cover all medical costs, including the ‘major medical’ items above. 

Budget comprehensive cover normally has low maximum benefits and will exclude some items. More generous comprehensive cover can include all expenses with large maximums but can be very expensive, especially at older ages.
Income protection insurance
  Cover if illness stops you from working (ACC only covers accidents).
Compulsory insurance
  There are some types of insurance that the government provides. Usually, there’s no choice about these.
ACC Cover Everyone in New Zealand is covered through ACC for injuries following an accident. The cover includes most treatment costs and can include compensation of up to 80% of your average weekly income before your accident. You pay a share of the ACC premiums automatically from your salary with PAYE. 
EQCover When you buy an insurance policy for your home or your personal belongings, your insurance company passes on a disaster insurance premium to the Earthquake Commission. This gives you EQCover.

 

8 rules of insurance

Whether you’re just thinking about getting insurance or about to sign up to a policy, keep these 8 rules in mind.

  1. You do not need to be insured against every event.
    Sometimes it is simply better to live with a risk than pay a premium.  As a general rule of thumb you should only insure things you can’t afford to lose or replace yourself. 
  2. Think about sharing the risk between you and the insurer.
    If you agree an ‘excess’ (where you pay for the first, say, $500 of a claim), you can cut costs while keeping needed protection for major claims. 
  3. If you have a car, you should at least have third party insurance.
    This covers you for any damage you cause to someone else’s car or property. Just imagine running into a Rolls Royce and having to pay for the damage because it was your fault. 
  4. If you own your own home, you should have home insurance.
    Your home is likely to be the single biggest asset you will own and one disaster could see it lose all value. You would be left with just the land (and the full mortgage!). 
  5. Re-consider your insurance regularly
    As your age and circumstances change, re-consider the amount, and type, of insurance you need. For example, you probably will not need life insurance unless you have dependants who would suffer financially if you died. As the children leave home and the mortgage is paid off, you probably won’t need as much cover. 
  6. Use reputable companies
    If someone tries to sell you insurance, check the background of the salesperson and the financial strength of the company issuing the policy. Ask how much the salesperson will get from selling you the insurance – this year and next. 
  7. Compare prices
    Always compare any policy with at least two similar ones provided by competing insurers. Premiums may be quite different. Even if they are similar, there can be big differences in the cover provided. 
  8. Get it in writing
    If you get a quote for insurance over the phone, always ask to be sent a written copy of the policy so you can check the details yourself.
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