Are you OVER-insured?

Many people are under-insured. That's a fact.

We don't like thinking about worst case scenarios. "Sort out insurance" rarely gets to the top of the to-do list. Insurance can be expensive - especially when the best case scenario is that you pay premiums over many years and you never make a claim against your policy.

If you have no insurance, or insufficient insurance, and something happens to you, however, the results can be devastating. You and your loved ones could end up in significant trouble.

When I hear about bad things happening to parents with young children, one of the first things I think is: "I hope they had insurance". Grief is bad enough, but it's even worse if it's served with financial hardship.

There is, however, a flip side. There are many people who have too much insurance. 

Take Bill Gates, for example. He doesn't need life insurance. If he dies, his family will be just fine. Of course, he's one end of the spectrum. But he's on a spectrum. Some people need insurance, some people don't. Likewise, some people need more insurance than others. 

If you have adult children and you have a nest egg, then like Bill Gates, it's quite possible you don't need life insurance either. Depending on your circumstances, you may not need trauma insurance, or TPD insurance, or income protection insurance.

Or, you might need insurance, but you might not need as much as you did 10 or 15 years ago when you put the policies in place.

You could be paying expensive premiums for insurance that you don't really need. Those are premiums that could be going towards saving for your retirement, or money you could be enjoying in other ways.

IMPORTANT!

You need to be very careful when making the decision that you're over-insured and choose to cancel or reduce your level of cover.

If you've had the policy for a number of years, it's likely you won't be able to get insurance on the same terms again. So it's a really good idea to talk with a professional. 

Unfortunately, for many insurance advisers, there is a financial disincentive to advise on this basis. It's likely that your existing insurance adviser is receiving trail commission which is linked to the premiums you pay. If they recommend that you reduce your level of cover, or that you cancel it, they will suffer financially from giving this advice.

This sort of advice is also risky. Very rarely will someone lodge a complaint or sue an adviser because they had too much insurance. Even more rarely will this complaint be successful.

If, on the other hand, someone recommends a reduction in cover, and someone then experiences an event that they would have been covered, there is a very real risk that they will complain.

This sort of advice is risky and there's a financial disincentive for providing it. It's no wonder many people are over-insured. However, many insurance advisers still provide this advice, even if it's not in their best interests. 

One of my litmus tests for a good insurance adviser is asking: "When was the last time you recommended a reduction or cancellation of an insurance policy?" If they don't have an example that comes to mind, this is when I start having questions. 


Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.