Sometimes I chat with people who are thinking of cancelling, or substantially reducing, their personal insurances as a result of short-term cash flow pressures.
Most of the time, when people are prompted to cancel or reduce their insurances, I try to get them to reconsider, or to s-l-o-w the decision down.
When making decisions about insurance, you need to step back, and think about the big picture and the long-term.
Of course, this assumes that the issue is short-term in nature, and not a situation where you have to significantly recalibrate your long-term financial outcomes.
Even if you need to adjust your insurance arrangements, I encourage you to take some time to give serious thought to the decision.
If you feel like you’re being forced into changing your insurance arrangements, consider:
- Your broader financial situation. Putting any short-term liquidity issues to the side, what are your assets and liabilities? What equity do you have in your home and other properties? What other investment assets you might have, such as KiwiSaver? Is your situation as dire as it feels?
- Is your situation long-term in nature? Admittedly, when you’re in the thick of things, it can be hard to determine. Nor it is always straightforward. If you’ve suffered a significant drop in income due to redundancy, for example, it can be hard to know whether this is a short-term state of affairs or whether it might have a long-term impact on your prospects for earning. If your business isn’t going as well as you expected or hoped in the past 6 months, it can be hard to know whether this bodes poorly, well, or somewhere in between, for the future. Because of this, I recommend buying some time if possible.
- Don’t forget: it’s one thing to focus on what you want to achieve out of life. It’s also important to consider what you DON’T want to happen, and take steps to manage these risks. If you’re suffering a short-term cash issue, then this is probably especially clear. Do you want to increase your exposure to financial issues in the future? Because if you cancel or reduce your insurance, you are increasing your long-term vulnerability for if and when the next shock happens. The next setback might be due to an insurable event.
- Remember not to think of insurance in binary terms – as in, you have it or you don’t. If you make changes, consider reducing your level of cover, or changing terms, before giving it up entirely.
- Are there any other options for retaining your existing cover? Personally, I would take fairly drastic measures to retain an appropriate level of personal insurance, even if that meant downgrading a car, selling stuff around the house, making a hardship application to my KiwiSaver provider, or even borrowing money somehow or another. At the very minimum, it would buy time. It might also be worth reaching out to your insurer (via your adviser) and/or checking the terms of your policy. You might be allowed to suspend your cover for a period rather than cancel (although during the time is suspended you won’t have cover).
Everyone is different, and it comes down to your situation. But reducing insurance cover, or getting rid of it entirely, is NOT something you should do lightly.
More than anything, don’t make a decision like this in the heat of the moment.