Diana Clement: Cover yourself or be prepared to get wet

Most of us would rather eat tripe than spend too much time thinking about insurance. But if you value your loved ones and your own financial security then it's essential to have some insurance.

According to a survey earlier this year by AA Insurance, almost a quarter of people would consider downgrading cover to balance their budget.

If, however, you view insurance as discretionary spending and ditch it at the slightest hint of financial tightening, then you could find yourself in a financial nightmare.

For example, the contents of your house would probably cost $40,000 or more to replace. Sometimes much more. Buying what you need to start again would be a tall order without insurance.

Four insurances which you really shouldn't be without in a recession are:

1. Life insurance (income protection and disability cover).

Life insurance is one of those products that we rarely buy voluntarily. It's a grudge purchase, but essential if you've got dependents. Even if your partner is working, life can be very difficult financially if one income is lost. And if your non-working partner dies, will you be able to afford a nanny for the kids?

If you've got enough cover it will also pay for the cost of a funeral and ensure that the remaining partner can make up for the lost retirement savings, which you would have put away if you'd stayed alive.

In New Zealand there are a number of add-ons which could be argued to be essential. That includes income protection, critical illness, and disability cover, which protect your greatest asset - your earning power.

The good news, says Vance Arkinstall, chief executive of the Investment Savings and Insurance Association, is that recessions make people review the level of their life insurance cover.

"As they see the value of equities or property go down, people think, 'Hang on, if something happened to me, the money we thought we would have available for the survivor is not as great as it was'."

It can be a worthwhile exercise to use one of the many life insurance calculators available at websites such as Publictrust.co.nz, Sovereign.co.nz and AMP.co.nz to get an indication of how much cover you might need. Surveys regularly show that most of us have little idea of the cover we need.

2. Buildings and contents insurance.

Up to 20 per cent of homeowners don't have buildings insurance cover, says Chris Ryan, chief executive of the Insurance Council of New Zealand. And in some areas 40 per cent of people don't have contents insurance. Yet even a small fire can result in a huge amount of smoke and water damage and if your entire home is destroyed the effects on your finances can be catastrophic. Imagine having to pay rent as well as continue paying a mortgage on a property that is no more than charred ruins.

What's more, burglary claims often increase in a recession. In the September, October, November period last year AA Insurance received 20 per cent more burglary claims than over the same months in 2007.

"You have to see [insurance premiums] as part of protecting your assets and your family," says Ryan. "We would encourage people to cut back in other areas of their spending. They can always ring their existing insurer or broker and say, 'Times are hard, what can you do for me?"' That might mean increasing the excess.

3. Car insurance.

Four per cent of drivers interviewed for the 2009 AA Insurance Drivers Index said they are considering cancelling their cover entirely - to make ends meet.

Yet car insurance isn't just about you and your car, says Martin Fox, deputy general manager, AA Insurance. "It's about the damage you might do to someone else's property if you have an accident. That's what third-party insurance covers."

That's not to say you shouldn't shop around or increase your excess to get cheaper premiums. Failing all else, reduce cover to third party so at least you're covered when you smash into a Maserati, or through the front of someone's house.

4. Health insurance.

We have an excellent public health service in this country. But there are some operations and procedures you need to wait for or pay privately. As a result around a third of the public have health insurance. Without it some people languish on waiting lists for years or have to pay the cost of their own hip and cataract operations. Seeing your child wait for treatment for certain conditions can be heart-wrenching.

You might think that health insurance is discretionary spending. Paradoxically, says Roger Styles, Health Funds Association of New Zealand executive director: "Unlike other forms of discretionary spending, it is not something which people readily cut back on in uncertain times."

In Britain, says Styles, there has been some evidence of people claiming on their workplace-subsidised medical insurance to get niggling worries cleared up before they're made redundant. Here in New Zealand around 600,000 employees and their families are covered by group health insurance schemes.

It's all very well having insurance, but if you don't read the policy carefully, then you could be wasting your money. Insurers turn down claims each and every weekday. And many of the sorry tales end up being dealt with by the Insurance & Savings Ombudsman. Some of the most common reasons for declining claims include:

Pre-existing conditions not being declared at the time of taking out a health, critical illness, or disability policy. That may mean declaring simple things like dizzy turns. If you haven't and you're later diagnosed with multiple sclerosis the insurer may be able to decline your claim.

Adding extra items to a claim that weren't really lost or stolen. If you do this, your entire claim may be declined.

Not telling the full truth. White lies are fraud. And even a small white lie can lead to an entire claim being declined.

Failing to disclose changes to your situation at renewal. A common one is failing to declare a drink drive conviction. If you don't and you later make a claim the insurer will find out and can decline the claim. Another common one is that you or a person you live with has been convicted of a crime or that the property is now tenanted. These are all what the ombudsman calls "changes to the risk".

The question is whether a prudent insurer would have taken on the risk if they'd known about these facts? If not, you're up the creek.

While some insurance may be essential, others can be avoided - especially in tight economic times. Wedding insurance is often touted as one that we don't really need. How likely is it that there will be such extreme weather conditions that you can't hold your wedding? Likewise insurance cover for credit card balances, or items bought on hire purchase is often very poor value for money.