How you can be overinsured and underinsured at the same time 🤦 and how to save some dollars
It's amazing how easy it is to skip leg day, and similarly, it's amazing how easy it is to have 'weak' insurance planning
...and it's kinda nuts how some simple tweaks will have you saving heaps on your fortnightly premiums.
Overinsurance is typically understood as "having more insurance than you need".
Normally we would think of say, having $2million of Life Insurance when we only need $1million, or worse, having $12,000 a month of Income Protection when we can only claim up to $8,000 per month because our income level doesn't match our sum assured.
But overinsurance can be a little more insidious than just being insured for a higher 'sum' than you need. From my experience in NZ as an Insurance Adviser, I typically see four key areas of overinsurance:
Low excesses
Short wait periods
Bad value Health Insurance 'add-ons' like GP and Prescriptions cover, Dental and Optical cover and others.
Insurance 'sums assured' lower than they should be
Your Health Insurance excess is probably too low
I can't remember the last time I recommended a client have a $0 excess on their Health Insurance. Heck it might have been at my former role 7 years ago.
The difference between a $0 excess and a $2000 excess on Health Insurance is as much as a 50% saving on your regular monthly premiums.
That's a lot. Typically, if you don't have a major claim within 5 years, you'll make your money back with a $2000 excess. Additionally, if $2k seems a bit much, you can always take $500 excess and make your money back every 3 or so years.
Key side note: Normally you'll have a separate excess of no higher than $250 on 'Specialist Visits, Tests and Diagnostics', so you can still get an MRI without having to pay $2000.
Your House Insurance sum assured is probably too low
Been speaking to some builder friends of mine. Apparently, the cost of some materials has increased as much as 30% in the last 12 months.
When was the last time you calculated your rebuild cost and updated your insurer? The onus is on you for that one. Here's a free tool from CoreLogic, but you might need a registered valuer for a complex rebuild: https://www.vero.co.nz/personal-insurance/house-insurance/cordell-calculator.html
Your House Insurance excess is probably too low = Overinsured
When was the last time you claimed on your House Insurance?
Never? Yeah me too.
How much would you have saved if for the last 15 years you had your excess set at $1250 or even $2250 instead of $500?
I'll let you work that out.
Your Health Insurance add-ons are probably a bad idea = Overinsured
With Accuro, Southern Cross or NIB, you can pay an extra $20 odd per month to be covered to see your GP and claim back on prescriptions. This figure is around about the cost for a 30-year-old, though the price increases with age.
So you're spending around $240 a year. If you're like me, and you see the GP once every couple of years for $55 dollars and rarely need prescriptions, you'd best cancel your GP and Prescriptions model and start banking that $240 a year.
Your Income Protection 'wait period' may be too low = Overinsured
Income Protection is awesome. It can replace up to 75% of your monthly income to age 70 if you can't work for more than 10 hours a week or if you're unable to perform an important income-generating task.
It's also tax-deductible, and the claim potential is huge. Imagine being 30 and going on a 40 year Income Protection claim to age 70 at $8,000 per month - that's a whopping $3,840,000 claim.
Fun fact - what's more, Income Protection claims generally increase by inflation every year, bolstering a claim significantly over its lifetime.
Whilst Income Protection is good value, it's also potentially the most costly part of your Insurance Planning (due to the high claim potential). You can't take out a higher excess to bring your costs down, but what you can do is take a longer 'wait period' (perhaps better described as a 'self-insurance' period).
You can choose between a 4, 8, 13, 26, 52 or 104-week wait before an Income Protection claim would kick in. The crazy thing is, moving from a 4 week wait to a 13 week wait (that's three months) normally halves your Income Protection premiums.
You've probably heard it said "hey it's a good idea to have at least 3 months savings".
Well yes, it is, and it will cut your Income Protection premiums in half.
Nice.
Your Health Insurance might not be up to scratch (check your policy's ratings!) = Underinsured!
One of my biggest gripes with some older Health Insurance policies (specifically from Southern Cross or NIB), or policies from Southern Cross in general is that they don't cover non-Pharmac drug care.
Here's a simple comparison (talk to your adviser for more nuanced details on this one though):
Southern Cross - Wellbeing 2
Non Pharmac Limit of $10,000 per annum
Partners Life Private Medical
Non Pharmac Limit of $600,000 per annum
NIB Ultimate Health Max
Non Pharmac Limit of $600,000 per annum
And Southern Cross is only 10% cheaper at the best of times. Keeping your health with Southern Cross without a good reason for doing so is a risky business. It's a bummer, but when you have majority marketshare, do you really need the best products?
So how can someone be overinsured and underinsured at the same time?
Here are some examples:
1. Having a lower Income Protection sum assured than 75% of your income and having a short wait period when you have the savings in place for a longer wait period
2. Having too high an excess on your house insurance and too low a sum assured to rebuild your house
3. Having the GP and Prescriptions module on your Health Insurance but not being covered for immunotherapy life-saving cancer drugs (non-Pharmac)
Well there you have it; some free general advice.
I can promise you one thing, there's a lot to navigate through with all this. Schedule in your annual review with your insurance adviser - we're here to help!
You can book in a free 15 min call with me here: https://calendly.com/samuel-at-reesthomasfinancial/brief-phone-call?back=1
Special credit to Richard Lemmens for the illustration!
Published by
Director & Adviser at Rees-Thomas Financial