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“I don’t have a mortgage so I don’t need life insurance – right..?”

The above is a sweeping face-value statement which, on the surface, may seem justified.. However… Is life insurance only to cover your debts if you kark it and end up on the pile of the no-tomorrows..?

Maybe, but maybe not. As with all things personal insurance, there are many factors, which effect people individually Here are a few reasons why

While life (death) is the insurance that most people think of first, it is by no means the only type of cover to consider. From here we can progress on two streams of thought; (a) what is the purpose of life insurance if you die? and (b) what are the financial risks to you should something happen that effects your ability to earn an income? These are not necessarily mutually exclusive questions – if you die, you income-earning ability stops!

There are a heap of other questions that feed from either stream, some overlapping, some taking us in seemingly random tangents. A good adviser will try to uncover as much as possible, asking many questions and painting many scenarios along the way. All in the hope of understanding what your key financial risks are so that an informed, logical and strategic recommendation can be made to their client.

2 examples – no mortgage – both have insurance

I have two examples below which may give pause for thought, neither case has a mortgage, yet both are exposed to financial risks.

Young, male, no mortgage, pays rent, good job – Mac (Auckland)

Let’s meet Mac (not his real name obviously), living in Auckland, renting with some friends in town. Mac has a good job and is moving along his career path in engineering. In his mid-twenties, he is not quite ready to buy a home yet his parents think that he should. He has a small amount of debt (less than $20,000) which he is paying off quite quickly.

Mac’s main concern is that something happens and he is not able to work anymore or earn an income. The last thing he wants is to be a burden on his parents, who are approaching retirement themselves.

If Mac dies:

Mac doesn’t have anyone that he would wish to bequeath money to. However, he wants his funeral paid for (and for his body to be repatriated back to Singapore). Mac also wants his debt repaid in full. The sum total of Mac’s life insurance would be less than $50,000.

If Mac is unable to work for 12 months due to illness:

Mac wants to still be able to live in his current accommodation. To do that though, he needs his rent and expenses covered.  A monthly paying disability insurance product similar to income protection (or one of the variations) would help here.

If Mac is never able to work again, due to permanent disability:

Mac would still wish to purchase a property, even if it was a small unit or apartment. Having a lump-sum TPD (total and permanent disability) insurance to cover this expense would give him some independence, even though he would never work again in his occupation.

Single mum paying rent single household earner – Maggie (Napier)

Maggie’s turn to say hi. She has recently left her troubled and violent marriage with 3 kids in tow. One child has mild autism another has ADHD. Qualified and working full time, Maggie is keen to put her past behind her and move on with her life. She has been left with virtually nothing financially and so is on a fairly tight budget. That being said, she works in the health department and knows all to well how one’s health can suddenly change. Maggie wants a basic plan in place for a couple of years while she gets back on her feet financially. Then we will review her strategy and adjust what we can.

If Maggie dies:

The 3 children need looking after – therefore a fund is now in place that should Maggie die, the children will at least get through their school years.

If Maggie has a serious health condition or illness:

If something serious happens to Maggie’s health, such as an episode of breast cancer or a heart attack, she will have a lump-sum of money to keep her household running for up to two years while she recovers.

The banks… Who’s debt are they covering? What’s the bigger picture?

The banks have done a good job of perpetuating this impression by advising everyone who gets a mortgage to get life insurance to cover the debt. Of course much of the time they are focused on covering their own liability – the mortgage.

Personal insurance is more than just paying debt if you die, but that a one place to start. Thinking about your own situation, who stands to lose if something happens to you? Are you only thinking about death, or are you also thinking about the ‘living insurance’ – covering your loss of earnings. Speaking with an experienced adviser can help you to think more deeply about these and other types of situations.

If you want to know more about this type of product, or you are concerned about your own policy and whether it properly covers your risks, drop me a line – I’d love the opportunity to chat and walk through it all with you.

Independent risk management advice New Zealand
Dominic Bish

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