You are here: Home / Archives for Life Insurance

There’s more to Life than Financial Strength

You’d have to say the Financial Strength Rating an insurance company has is an important factor in considering who to place your insurance with and most right thinking people know this to be intuitively correct.

In the case of a life insurance policy (or health, income protection and  trauma insurance for that matter) you need some reassurance that the company will be around in 5, 10 or perhaps even 30 or 40 years time to honour a claim you might make on a policy that you’ve been paying premiums on for a long time. You want to be sure the company is still going to be around to pay your claim in the future, don’t you?

Which is where financial strength ratings come in. They provide a kind of gauge so that the man on the street can get a handle on whether a company is ‘good for it’ or not.

But just as the Heart Foundation Tick is no guarantee that the food you eat won’t kill you so a financial strength rating is not a rock solid guarantee that the company will be around to honour a claim. Still, a rating system has plenty of merit – if you’re able to get a high rating then for the layman it makes a pretty good arbiter of longevity.

When it comes to insurance, financial strength can’t be considered properly without thinking about Reinsurance at the same time.

Reinsurance describes a situation where your insurance company passes on a portion of the responsibility for paying claims to another insurance company, usually in exchange for a portion of the premium you pay. This is a totally normal arrangement in both the life insurance and general insurance industries and makes a lot of sense because the load is shared between two or more companies at claim time. Reinsurance will be very important if lots of claims come in at once and by spreading the load in this way it should actually enhance a company’s financial strength. Having said that, good reinsurance arrangements on their own don’t always translate into a high rating. Hence the title of this post – there’s more to life than a financial strength rating.

Naturally enough cost and what you’re covered for are the primary considerations when choosing which insurer to go with and the final decision is often backed by a recommendation from a trusted person. The reality is that an insurers financial strength is not always considered even though it should be.

 

Single parent? Think about this.

“If something were to happen to  me, would you raise my child?”

As a single parent, you may have already considered who will care for your child/ren if anything should happen to you. You may have even asked someone to do that job if necessary.

But the trust you place in another person results in an huge financial burden – food, clothing, medical care, hobbies, sports, holidays, even the need for a larger home means costs add up. Where will the money to support your child come from?

Usually we forget that raising a child has a financial cost and could be unrealistically burdensome on the child’s new guardian. While there may be some assets (such as a house) that could be sold to help alleviate the burden its our experience that not only are these things encumbered by mortgages they also need to be sold quickly which means they sell for a bit less. In other words, there isn’t always as much left over as you might (optimistically) think.

The gap between what you get from the sale versus the amount of money needed for your children’s upkeep can be easily (and cheaply) filled with life insurance.

Now its all very well to have the money sorted. A vital piece of your estate plan is your will – a legal document that specifies how your assets will be managed when you die. Verbal statements of intentions are often disregarded in formal legal proceedings and without a written will, the law determines the disbursement of your assets and appoints a guardian for your children. Both of those could be totally different to your real wishes and some absurd results can occur.

Most often, the other parent is the appointed guardian next-in-line, but there are times when this is not the case. The other parent may be deceased for example. If possible, sit down with your child’s other parent and draw up a joint family care plan that designates the agreed upon future guardian and care of the child.

The most important first step is to work with a knowledgeable life insurance and estate planning people to ensure you are considering all scenarios and options to establish the long-term plan that’s best for you. Call us to get started now.

 

Make your tax cut work for you

calculatorFrom the 1st of October every income earner in NZ gets a pay rise thanks to a reduction in tax rates. At the same time GST is on the increase but the government reckon the overall effect is that nearly everyone will have a few more dollars in their pocket each week.

The table below shows the likely improvement to your pay packet:

Income Weekly Tax Break GST increase Net weekly change
$30,000 $16.15 $9.87 $6.28
$50,000 $29.42 $15.71 $13.71
$70,000 $40.96 $20.92 $20.04
$100,000 $69.81 $28.14 $41.66

About half your tax break gets chewed up by the GST increase. And while some people might moan about that, the rest of us are glass half-full kind of people and will realise that the balance is available to do something positive – like putting it onto the mortgage, putting an insurance backstop in place or building your savings/kiwisaver.

A typical client of ours would be a couple with a combined income of around $100,000 which implies an improvement of between $25-$30 per week or at least $1300 per year – not too shabby and definitely an amount you can put to good use. Even if your income is lower than that you will get something so why not use it wisely?

Put it on the mortgage or other debts

Using our typical client as an example, the effect an extra $30/week has on a $350,000 mortgage is

  • Knocks 4.5 years off the loan term
  • Saves about $76,000 of interest (not bad!)

Put it into life insurance

Sounds crazy right? Well, not really. If you happen to die before the mortgage is paid off you’re partner will have to do it on one income and that might not be easy, especially if you have kids at the time. But if there was enough life insurance to clear the mortgage things would be different. Think about it – would you cope with the mortgage and your other bills on one income?

A $350,000 life insurance policy for two non-smoking 35 years olds is less than $15/week. The tax break gives you money to get some insurance without changing your budget at all. Thats a pretty good investment I’d say.

Put it into Kiwisaver

Let’s assume you make use of your tax benefit by increasing your Kiwisaver contributions from 2% to 4% of your $50,000 salary (that’s roughly equivalent to the increase shown in the table above). If you’re 35 years old now:

  • Your fund will grow to about $415,000
  • If you’d done nothing your fund would only get to about $300,000

Our advice?

The point we’re trying to make is that while the extra money you get each week might not seem like much, it really adds up to make a massive difference over the long term. So find out exactly how much extra you get in your first pay after the 1st October. Take half and apply to one of the three options above by calling your bank, us or your employer. Nice one.

 

«Older Posts