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A Fireman’s story

I have a recent client, a fire fighter with over 9 years experience, who was injured in non-fire workplace accident. It has meant that he will be off work for around 14-18months while he recovers back to full-time duties. He and his wife have some bare-essential cover for personal risk, some life insurance and a small trauma amount. They didn’t have any income replacement options, except the for trauma, which only pays on around 47 specific health conditions. Don’t get me wrong, trauma is a great product, but can be limited, as this experienced fire fighter found out.

Because his incident was a workplace accident, ACC are paying 80% of his pre-condition salary. This is good, but still a drop in household income for the family (there are young children in the household too). As this person returns to work, his ACC payments will be reduced pro-rata for the hours he works. The Fire Service will increase the salary payments to him, but there will still be a shortfall in household cash.

In New Zealand, we are very fortunate to have ACC, which is a state run accident insurer. We are also fortunate to have a social safety net with the WINZ sickness benfefit. However, this benefit is means tested, which effectively looks at all household income (not just the person effected) to deteremine how much to pay. The maxmium aailabe for this benefit is around $343 a week (less any other income for the household). Many families that I see would not qualify for this benefit.

Back to our fireman, one thing that this guy kept saying to me was, “I used to think it would never happen to me”. He is fit and sporty and thought he was bullet-proof. Know he realises that it can all change in an instant.

Gambling on Life

A Recent global Insurance Survey has estimated what the basic insurance is for a two parent, one child household.

To illustrate the level of underinsurance in Australia, Rice Warner’s Underinsurance in Australia 2017 report estimates the insurance needs for 30-year-old parents with children to be:

  • 8x income for life (to replace income)
  • 4x family income Total & Permanent Disability

This is for basic household cover.

Another source, from a financial planner (again in Australia) considers that the minimum cover should be

  • 75% Income Protection with a 90 days wait period payable to Age 65
  • 10x income for life insurance
  • 10x income for Total & Permanent Disability

Against this, we can look at New Zealanders, and how many people do not have these types of insurance:

  • 62% do not  have Life insurance
  • 86% do not have Income Protection
  • 89% do not have critical illness protection

People think that

  • It wont happen to them
  • ACC will cover them
  • WINZ will cover them
  • They cannot afford it (any of it)
  • …They Don’t think about it

This puts the risk and financial burden on the family freinds and businesses to support theses people when the worst happens.

Let’s look at replacing your income for a short period.

 ACC will cover me.. Right..?

ACC will cover up to 80 percent of your income in the event of an accident that prevents you from working. It does not pay an income income for you or your family iif you are too sick too work or have a trauma or certain kinds of disability such as a stroke.

The government will help… Right..?

The Government’s universal sickness benefit entitlement is around $343 a week. However this is only paid once all other household income is taken into account. This means that many families find themselves too well off as a household to qualify for a sickness benefit, but too poor to pay the mortgage and food bills.

 Many families without income protection insurance find themselves experiencing serious financial difficulty v if the main household income earner were off work for as little as a month.

In many cases households will only last 4-6 weeks if all their income stopped tomorrow – this is what families tell me everyday.

Self-employed…? Look out, you could be in real trouble. Meet Pete…

Pete took out Income Protection 4 years ago when times were good. He was earning $100,000 consistently for a few years, times were good. In the last couple of years, there were different contracts, a couple went bad, in the last 2 years his income was only $75,000.

Pete has a great accountant who minimised his taxable income due to the deductible costs associate with the business. This means that Pete’s financial returns show that his taxable income is only $50,000.

2 clear issues

  1. The IP that he got will only pay to his current provable earnings as he is on an Indemnity product
  2. Any ACC claim will only pay to 80% of his proven taxable earnings ($50,000).

2 scenarios:

  1. Pete has an accident and breaks his hand. He was having a bad day, momentary lapse of concentration, and the slab of concrete he was close to slipped its shoring. Luckily the hand should recover in 12-18 months.
    1. ACC will pay Pete 80% of his $50,000 = $40,000 [this assumes Pete is on ACC Cover Plus , and not Cover Plus Extra]
    2. The gap between what Pete actually got ($75,000/12=$6,250.00 ), and what he gets from ACC ($40,000/12=$3,333.33) is $917 out of pocket each month for 12-18 months ($35,000-$52,500).
  2. Pete has a minor stroke. He is only 49, but he will be out of work for 12-18 months while he fully recovers his motor and cognitive functions.
    1. Pete will not get ACC as this is not an accident
    2. Pete will not get his income protection amount set at his prior earnings of $100,000 when he took the policy out, even though he has been paying premiums on this. Becasue Pete’s policy is Indemnity, the insurance company will want to see his financial returns. When they realise that his taxable earnings (even with some write backs) is closer to $60,000, they will pay on 75% of this lower amount each month (($60,000/12=$5,000.00) x75%= $3,750)
    3. On Pete’s earnings of $75,000/12=$6,250.00, this will be $2500 a month less for his household to live on (or $30,000 less over 12 months).

Now if you are self employed, and see your self in Pete’s type of position, how would your household survive with $30,000 less a year? Remember too that the earnings from ACC and the Indemnity products are both taxable. That’s right, both are still yet to be taxed (in the above workings).

There are other products and strategies that can be put in place to limit these risks. The above is by way of example for people who believe they are ‘covered’ but actually have exposure to risk for their families. Their families will be worse off for 2-3 years (physical recovery and then financial recovery – to get back to where they were prior to the health event).

Protecting income has to be the biggest concern for families – without income the family starts to hurt very quickly. If you see yourself in any of these situations above, or you want to talk through your current insurance strategy with me, I’d be happy to help where I can.

Life Insurance for when life happens!

Dominic Bish

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