Insurance may be expensive, but no insurance can have an even higher price. Photo / Getty Images
OPINION:
Q: How do you feel about home and contents insurance? I am beginning to think it is nothing but a legally sanctioned rort.
My husband and I, 91 and 84, share expenses, and one of mine is insurances. For over 25 years I have been with the same company, over which period I would have paid well in excess of $50,000 in premiums.
I have been turned down for some minor contents claims. Then, several years ago, my ceramic cooktop was cracked. Because I was unable to explain how it happened — I wasn't aware of anyone dropping something on it — the claim was rejected. Because cooktops were no longer made in that size, this led to getting a larger hole cut in the bench etc. About $3000 in total.
Our most recent experience has left me feeling quite bitter. We had water ingress, which caused part of the ceiling to deteriorate. At my request they sent in an assessor, who assured us we had a legitimate claim and that he would recommend they accept it. Despite this, they still managed to find a clause enabling them to escape.
Because of our need to be nearer medical services, we recently purchased a smaller house. Our future home is insured with the same company.
I am seriously considering whether to renew the policy. The house is nearly four years old, steel framed, steel roof, brick cladding and aluminum joinery. Not exactly a high fire risk. It has plenty of security and is in a good area with a great neighbourhood watch.
It seems pretty unlikely that in what remains of our lifetimes we might lose the lot. Any minor mishaps we could cover ourselves, and no doubt would have to anyways. So why should I waste my money on house insurance?
A: Where have you been over the last few years, while earthquakes, eruptions, floods, vehicles driving into houses, even a gas explosion in a house, have torn people's lives apart?
It won't happen to you? I'm sure that's what many of the victims thought too. Sure, your house might not easily burn, but what if the house next door, or surrounding plants in a drought, were blazing?
Canterbury people thought their region was not earthquake-prone. People living in houses that are not low-lying didn't count on floods rushing down valleys, or burst water mains. Then there are lightning strikes, plane crashes, hurricanes ... There's no such thing as a house that can't be destroyed.
If your house were badly damaged, it would be terrible to have to pay for repairs or a new home on top of having to cope with the huge disruption.
The main purpose of insurance, I think, is to protect you against big bad things happening. By all means cut back your premiums by choosing a large excess. That means you won't be covered for the smaller stuff that you can cope with anyway.
You might also reduce your premiums if you install smoke alarms and burglar alarms.
And some insurance companies offer discounts if you have all your insurance — such as house, contents and cars — with them.
After your experiences with your current company, you might want to switch providers. A great source of info on this is Consumer NZ. You will probably have to join to get access to all the information, but it's worth joining anyway.
But please, whether or not you change companies, don't leave the lovely new house uninsured.
One more thing: if you are unhappy with the way your insurer has treated you, complain to them. If that doesn't resolve the problem, ask who their disputes resolution scheme is and contact them. They are free to you. They will listen to your side and the company's side of the story, and may change their decision or award you compensation.
Every insurance company, and every other provider of a financial service, has to belong to one of these schemes. I'm a director of one scheme — Financial Services Complaints Ltd, or FSCL — and I wish more people would use them.
Q: I read with concern many of the letters published in the NZ Herald. Far too many people are hell-bent on tax avoidance or tax evasion and don't stop for one moment to think, "where does the Government get its income from to provide the many services a country and its people require?" I wonder how many of these people carrying out tax avoidance also complain about the lack of services in hospitals, schools, roads etc.
Time for all people to be more honest and caring so that each of us gets to use the services we need. No one can take their thousands or millions of dollars with them when they die, so why not be more kind to their fellow humans?
A: I can't argue with that. Tax experts sometimes say anything's fine as long as you're not breaking the law. It's a challenge — to outwit the Government. Perhaps they should paste your letter to their bathroom mirror!
Q: I read with interest your response last week regarding the issue of inheritance. I have terminal cancer and am organising my will for my teenage children (aged 15 and 17).
The lawyer encouraged me to consider putting a clause in the will stipulating my mortgage-free house not be sold until they reach the age of entitlement (19 and 21 respectively) to gain access to the money.
The rationale was the need to keep the value of the asset intact, and with house prices growing and interest rates so poor, the suggestion was that selling and putting the money in savings would degrade the value by the time they received it.
I have had friends who once owned houses but after a divorce waited for prices to drop and are now priced out of the market, so the lawyer's comments made sense to me. I now question this after your column, so I wonder your thoughts on the lawyer's advice?
A: I worry about lawyers giving financial advice. Some are experts, but many family lawyers are not, and I've heard a few disturbing stories. But this is not one of them.
We can't be confident that house prices will keep rising. The very fact that they've risen so far in recent years is an argument against, rather than for, continued big price rises — especially given recent tax changes. It wouldn't be surprising to see house price falls in the next couple of years.
Nor can you know what your children are likely to do with their lives over the next few decades.
They might stay living in your house, perhaps with another adult, (I'm assuming their father is not around). Or after a while they might sell it and buy one or two small houses or units or apartments for themselves and perhaps some tenant/flatmates.
They might also want to spend some of their inheritances on tertiary education or training, or starting a business, or going overseas — or, for that matter, partying. But that's unlikely to use up the bulk of the money.
Ultimately, if they are typical New Zealanders, they will probably use most of their inheritances on buying homes at some stage.
Your friends' stories underline the fact that if you want to be in the house market, and you have the money, it's safer to stay in the market. And to a considerable extent house prices move together, so it wouldn't really matter if all prices rise or fall in the meantime.
So I don't have a problem with the stipulation. However, I think it's more important that you line up somebody to help your children with their money after you die — if you haven't already done that. A friend or family member would be ideal, but only if they really understand financial stuff. Otherwise, I suggest you choose a financial adviser, perhaps from those on the Advisers page on maryholm.com.
It would be great if the children could help you select someone, so they know and trust the person.
These are not easy times for you all. I hope things go as well as possible.
Q: Many managed funds, including some KiwiSaver funds, charge performance fees — over and above normal fees — to reward the fund manager for supposed exemplary performance.
I have noticed that many funds have charged performance fees for the year to April 2021. But as the FMA reminds us, the phenomenal returns are really just a reversal of the sharp decline in markets following Covid-19. How can fund managers justifiably charge performance fees in this case? And doesn't it send the wrong message to investors?
A: First, a bit of background. On May 29 I wrote about the Financial Markets Authority (FMA) warning fund managers "to avoid advertising large investment returns for the 12-month period to March 31 this year, since this could mislead investors.
"The period includes none of the severe February and March 2020 Covid-19 sell-off in the market, but all the following recovery. The result is some phenomenal returns for many funds, particularly those with large exposures to equities (shares)."
In other words, just because a KiwiSaver — or non-KiwiSaver — fund did really well in that period, that doesn't necessarily mean the managers are anything special.
You have now raised the thorny issue of performance fees. At first glance, these seem fair in normal times. If a fund manager does particularly well, why shouldn't they be paid more? But performance fees come with problems, including:
• They can incentivise managers to concentrate on short-term performance, when the long term is what matters for investors.
• Managers might be tempted to take inappropriately high risk in the hope they will be in luck and will earn extra fees. If their "bet" goes the wrong way, they still get the ordinary fees. They are not penalised.
• The fees must be structured so managers are not rewarded if nearly all KiwiSaver funds at the same risk level do well in a period, but only if they rise above the pack. This is what concerns you.
Which KiwiSaver funds have recently charged performance fees? "Disclose Register data show six KiwiSaver fund managers charged performance fees for the quarter ended March 2021: Fisher Funds, NZ Funds, Milford Asset Management, Nikko Asset Management, Quay Street and Implemented Investment Solutions (InvestNow)," says an FMA spokesperson.
I then asked, "Of the KiwiSaver providers who charged a performance fee during the year ending March 30, 2021, does the FMA consider all those fees were justifiable?" The short answer is that the authority doesn't know yet.
In April, the FMA published two "guidance notes". One is about KiwiSaver performance fees, telling fund managers how it expects them to deal with the sorts of problems listed above.
The other is on "Managed Fund Fees and Value for Money". Says the spokesperson, "The FMA expects fund managers to work with their supervisors to review fees and value for money annually. This includes performance fees, where they are charged.
"Given the recency of that guidance, we have just begun to work with supervisors to implement it." Supervisors, which are separate companies from fund managers, "must act in scheme members' interests when overseeing managers, and are themselves overseen by the FMA in this respect", he says.
If a fund manager's fees are found to be unreasonable or they don't "represent value for money for their investors", this "will prompt concrete remedial steps including increasing services, reducing fees or both".
It's good to see we're finally getting action on KiwiSaver fees — including performance fees — some of which seem too high to me. I hope this process works.
CORRECTION: This column said that Koura KiwiSaver sometimes charges performance fees. This information came from the Disclose Register, but Koura says it is incorrect. The provider does not charge performance fees.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
'Debt becomes more like a rent payment that people get so used to paying.'