A policy that always pays up

By DIANA CLEMENT


In the insurance lottery, there's one policy that pays the jackpot for everyone sooner or later. That's life insurance.

Like taxes, death is one of life's two certainties and doesn't always come with old age. According to data often quoted by the life insurance industry, one in five men and one in eight women over the age of 30 will die before they reach 65. Breadwinners who don't take out life insurance often condemn their dependants to poverty if they die unexpectedly.

Yet only 40 per cent of households pay into life insurance, Statistics New Zealand says. That's half the number that need it, adds the Financial Planners & Insurance Advisers Association (FPIA).

You'd think that given the certainty of a payout and the consequences of dying without life insurance if you've got dependants, more people would buy it. However, figures from the Investment Savings and Insurance Association suggest that insurance advisers are finding it increasingly difficult to get people to sign on the dotted line. One reason is that few of us want to face the fact that we're mortal.

Another reason is that the insurance industry doesn't make it easy to buy. In Britain, where I did my OE, I simply trotted down to the local Tesco supermarket, filled in an application form at the checkout, posted it off and started monthly payments for my cover. If I'd wanted to shop around further I could have logged on to one of the independent comparison websites such as Money Supermarket, searched for a suitable policy, compared prices and paid online with my credit card.

Unfortunately, it's not so easy in New Zealand.

The FPIA says that's because life insurance is a product sold here by the people who cold-call at dinnertime, not actively bought.

If you do want to shop for life insurance, then you need to be aware of the way salespeople make their money as this can have a huge impact on payments.

Insurance salespeople here have no obligation to tell consumers how much commission they receive. This is not surprising as their initial commissions can add up to the first two years' premiums you pay.

They'll also receive small renewal commissions every year and may even get a chunky loyalty bonus if you still pay into that policy after a certain number of years - often four or five.

Salespeople have no obligation to present you with a policy that is the best value for money. Many are tied to one insurer and only sell that company's policies. Others may get bonuses or increased commission levels from an insurance company for putting a certain level of business their way.

If the commission minefield isn't enough, you will also need to check what bells and whistles are involved, the period of cover and if the premiums are static or increase with inflation or age.

Given the hard work involved in cold calling and getting new business, insurance salespeople make a considerable percentage of their profits by "churning" - ie. getting clients to replace their life insurance every few years. Considering the enormous initial commission salespeople receive, it's in their interest to find you a "better" policy every few years.

If your broker does suggest changing policies, you need to be sure that the replacement policy is as good as the one you're giving up. If your health has changed since you last bought life insurance you could find your cover downgraded. And if any new medical conditions aren't disclosed when the new policy is taken out you could have your claim declined when you die.

It's not surprising that consumers don't trust life insurance salespeople. But this isn't a reason to skip insuring your life. Life insurance is a necessary evil for a large percentage of the population if they don't want to leave their dependants in the lurch.

And it's not just the main breadwinner who needs it, says Neil Bailey, manager of the Porirua Branch of the Public Trust. If a stay-at-home partner dies, it can be costly to arrange care for dependants. With a life-insurance payout, the remaining partner may be able to pay for help.

The cost of life insurance varies according to your age, factors such as whether you smoke, and whether you want to add bells and whistles such as disability and critical illness cover.

A basic policy from the Public Trust to cover someone like me for $300,000 costs around $23 a month or $57 if both partners are covered for a 25-year term. The cost increases as the insured couple age and many people dispense with life cover once their children are educated and off their hands.

If you want to work out how much cover you need, use the calculators on the Public Trust or Sovereign websites. They'll help you factor in costs such as funeral expenses, children's education and the annual cost of maintaining your family in the style they are accustomed to.

If you want to buy life insurance, it's best to learn the jargon before you head for the salesman with dollar signs bulging out of his eyes.

Some life insurance policies are, in fact, savings plans or endowments, with an element of death benefit included.

Within the Term Insurance umbrella there are a number of basic policy types and the cost varies depending on how you want your premiums fixed.

The simplest, but one many people can't afford, is the single premium policy where you pay a lump sum up front. You can buy level policies with premiums that stay the same through the life of the policy. Annually renewable policies where premiums go up as you get older are probably most common. But if you want some certainty you can choose a stepped policy where the premiums are fixed for a number of years and then go up.

* Diana Clement is an Auckland-based freelance writer.