Mary Holm: Smart ways to protect your health

My wife and I are 68 and 66 respectively, happily retired and financially secure. We are both in good health, though both have had hip replacements in recent years.

We are still careful with our money, and I am currently reviewing our insurance requirements. I am concerned at the cost of health insurance, and looking at ways to minimise this cost while maintaining "adequate" insurance cover. I don't recall seeing an insurance-related question in your column, but it is worthy of a general discussion on the reasons for having insurance, and the options for managing the cost.

In my view, it is easy to over-insure against the worst possible calamity or series of calamities, whereas an individual is likely to only experience one or two in their lifetime. In New Zealand, a major emergency like a heart attack will be looked after in the public system, and insurance is needed mainly for joint replacements and the like, where being on the public list can mean a very long wait.

Our health insurance has options for large excesses, up to $6000 a year, and this drops the premiums significantly while maintaining cover for major surgery, hospitalisation and ongoing treatment. We are in a position to carry such an excess, paying medical expenses out of our investment income and using capital if necessary.

I am a great believer in insurance for major risks (for example, the house burning down or a major hospitalisation), but minor stuff (like a broken window or a visit to the doctor) being paid out of income.

One option I am considering is self-insurance, putting money into a "health emergency fund" each month and using it as required. Saving our present health insurance premiums would fund a hip replacement every two to three years!

I would appreciate your thoughts on the best strategy for insurance, particularly health insurance. It would make a change from KiwiSaver.

Now, now! As I pointed out recently, these days this column probably covers KiwiSaver too infrequently, given the percentage of the population affected. Still, I admit that insurance is probably also covered too little - partly because I receive few questions about it, but also because the very word tends to make people yawn.

So the challenge is: how to make insurance sexy. The best I can come up with is to look at ways you can save lots of money on insurance - money you could then spend on romantic nights out.

Broadly, I agree with your approach. It's common to over-insure. As a wise person once said, "If you've never missed a plane, you've wasted too much time at airports."

For many people, it's a great idea to have large excesses on all insurance - car, house, contents and so on. If you have loss of income insurance or similar, you can set it up so the payments kick in only after you have been off work for a few months, and the premiums will be much lower.

In health insurance, you could take an option like the $6000 excess, or get cover only for hospital and some specialist expenses, not doctor's visits and other relatively minor stuff.

In all of these areas, every now and then you'll have to fork out lots - perhaps several thousand dollars - when something goes wrong. But you can console yourself by thinking of your much lower insurance premiums. You also avoid the hassle of making minor insurance claims.

A friend of mine, whose health insurance covers specialists' fees only when the appointment leads to hospitalisation, recently paid close to $1000 for fees and scans that ended up with an "all clear". She therefore had no insurance cover, but commented that she much preferred that outcome to the alternative. Having the right attitude is important.

The low-excess approach works particularly well if you are reasonably healthy and a fairly careful driver and home owner - the type who makes fewer than average insurance claims even if you have extensive cover. The average claimer will probably also win, because insurance premiums cover not only the average person's claims but the insurance company's administration costs and profit. But if you are unhealthy or careless, this is probably not for you.

The crucial point is to have enough readily accessible money to cover your expenses if you have a really bad year or two - which will happen every now and then.

One way to do that is to self-insure, as you suggest. But make sure you'll have enough money in that fund - or can easily top it up from elsewhere - if a really bad year happens early on. It sounds as if you are okay, but others might want to build up a self-insurance fund while gradually increasing their excesses.

An alternative is an idea I read about in Peter Bernstein's interesting book Against the Gods - the Remarkable Story of Risk. Bernstein tells of a professor he knows who, at the start of every year, sets aside several thousand dollars that he plans to donate to a charity.

Throughout the year, whenever something unexpected and expensive happens - including paying insurance excesses, parking or speeding fines and so on - he takes the money out of the charity account. At the end of the year, he gives the remainder to charity. Some years it gets heaps; others, very little. In effect, the charity pays when things go wrong.

A couple of other ways to save on insurance:

* See if your insurer offers a deal to people who have more than one policy with them. For example, some companies offer a break for having your house, contents and car insurance all with the same company.

* Some companies charge lower premiums if you take steps to protect yourself, such as installing a burglar alarm.

* Consider how much life insurance you have. While some people have too little - their dependants would struggle if they died - others have too much.

If, for instance, your children are now self-sufficient, or they would manage on what you leave them if you die, you might no longer need any, or so much, life insurance.

Very interesting reading the column on November 14. The advice you gave about the rental property, now under value compared to the 100 per cent mortgage, was to sell up and cut the losses. My question is: could this be good advice re Rabo perpetual preference shares?

I bought a sizeable amount of them after what I thought was "due diligence" and advice from "reputable" people. I fell into the trap of finding out too late what they really are - cheap money for the borrower and all the decisions about redemption and interest rates to their advantage.

I could wait another eight years for redemption, but that is not guaranteed! In the meantime the interest rate is only a little better than an on-call account, and the market price to sell the preference shares is like the rental house - significantly less than the investment.

My "reputable" advisers still say they are good - hang on to them. What do you say?

Given your feelings about the preference shares - coupled with the fact that no expert I respect is rushing to defend them - it would be good to be rid of them. But is now the best time to sell?

Nobody, reputable or not, knows the answer to that. We can't forecast market movements - which will affect your interest rate and sales price.

But one of the great advantages of investments in bonds and shares, compared with property, is that you can sell them little by little.

I suggest you set up a plan to sell, say, a quarter now, a quarter in six months, a quarter in a year, and a quarter in 18 months - or perhaps spread it over a longer period.

It's important to also think about what you will put the money into. Should you ask your advisers? My advice is similar on this - given your feelings, move on to someone else. I hope to be able to give you some help in how to choose a new adviser in this column in two weeks.

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.

Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

CHANGE TO TASKFORCE MEETING

I recently invited readers of this column to attend a breakfast at which the Capital Market Development Taskforce will release its report - including a large section on how the investment process could be improved for the ordinary investor.

Unfortunately, the taskforce has had to change the meeting. It will now be held at lunchtime in downtown Auckland on Wednesday, December 16. There will also be a breakfast meeting in downtown Wellington on the same day.

The taskforce - of which I am a member - would like to invite 10 members of the public to attend each of these meetings, as representatives of New Zealand investors who the taskforce hopes will benefit from its recommendations.

To be in the random draw to attend, send your name and address to mary@maryholm.com, putting either "Auckland lunch" or "Wellington breakfast" in the subject line, or mail it to "Auckland Lunch" or "Wellington Breakfast", Capital Market Development Taskforce, PO Box 1473, Wellington, to be received by December 8. Winners will be notified directly, and listed in this column on December 12.

OPPORTUNITY TO HELP OTHERS

Before you rush out and spend hundreds of dollars on Christmas presents that the recipients might not even want - perhaps running into debt to do so - consider the following.

Several studies have shown that giving to others can make the giver as happy, if not happier, than the receiver.

You can help your relatives and friends to give - and to feel a warm glow on Christmas Day - by arranging for them to donate your money through one of several charities.

It works like this: You choose items from the charity's catalogue to be given to those in need in the names of your relatives or friends. "Prices" usually range from a few dollars to hundreds of dollars.

The charity will send you notification of the gifts, which you can pass on to your relatives or friends.

The following charities offer programmes like this:

ChildFund New Zealand: 0800 223 111 or www.childfund.org.nz

Christian World Service: 0800 747 372 or www.cws.org.nz

Fred Hollows Foundation: 0800 227 229 or www.giveamiracle.org.nz

Leprosy Mission: 0800 862 873 or www.reallygoodgifts.org.nz

Oxfam: 0800 600 700 or www.oxfamunwrapped.org.nz

Save the Children: 0800 167 168 or www.wishlist.org.nz

TEAR Fund: 0800 800 777 or www.giftforlife.co.nz

Unicef: 0800 243 575 or www.inspiredgifts.org.nz

World Vision: 0800 245 000 or www.giftsofhope.org.nz