What is Insurance and Investment
About this Insurance and Investment Business
Some plain talk about a simple business that often seems complicated
What is Insurance?
Insurance is an agreement that if something unplanned happens you’ll be paid compensation for the loss, damage, illness or death in return for you paying pre-determined amounts of money prior to the unexpected event. Insurance is protection against a possible (undesirable) event. Another way to look at insurance is transferring your perceived risk of a loss to an insurance company. Methods of insurance date back over 5,000 years ago when traders looked to reduce their risk when moving goods between cities.
What is an Insurance Provider?
Insurance Providers offer insurance ‘products’ that they underwrite (accept) the risk on for their clients. Often insurance providers will use insurance brokers that are not on their payroll to offer products to the public where the needs of the client and the provider are aligned. There are insurance providers that specialize in specific products like Health Insurance, Life Insurance, Car Insurance and they get efficient at a few products rather than offer insurance for everything. In New Zealand there are often dozens of providers for each type of insurance and it can be very hard to chose without outside help.
What is Life Insurance?
Life Insurance pays out a sum of money either on the death of the insured person or after a set period. Generally life insurance is purchased for the protection of your loved ones that are left behind should you pass away. Do you need life insurance? If you have debt, dependents (kids, grandparents, pets...), your own business, financial obligations… if you answer “yes” to any of the above you should consider your options. There’s a myth that life insurance is expensive, costs are always relative,itʼs usually less than car insurance and competitive options can be found if you take the time to research and compare policies.
What is Health Insurance?
Health Insurance covers you against the risk of unexpected health costs and covers a wide variety of illnesses and accidents. You may have a family history of specific diseases or genetic considerations. Insurance companies take into account your age and a wide variety of things when providing health insurance cover.
What is Trauma Cover?
Trauma Insurance, sometimes known as Critical Illness Cover is one of the newest types of policies available and is becoming more popular as a means of wealth protection.Trauma Insurance, like Life Insurance and TPD Cover, is a lump sum payable; however it is paid on a medically diagnosed event rather than disablement like TPD Cover. Most of the main conditions covered by different providers include heart problems, cancer, and stroke (there are some exceptions).
What is TPD Insurance?
TPD is short for Total Permanent Disability and pays a lump sum payment if an accident or sickness leaves you unable to work in your business or current occupation or any other line of work ever again.
Does Combining Policies make it cheaper?
Combining insurance policies sometimes saves you money. You can combine your own policies like Life Cover and Health Cover with the same provider or combine policies in groups for the same ‘product’. Couples, are often able to access better rates and better coverage together than as individuals. Some of the benefits of combining insurance policies include discounts for having multiple policies with the same company and getting the same coverage for less.
What is Commercial/Business Insurance?
Commercial Insurance coverage for businesses is protection against potential losses through any number of unforeseen circumstances like theft, liability, property damage, and for coverage in the event of an interruption of business or injured employees. This includes fire and natural disasters. In New Zealand this is often divided into Business Assets Insurance, Business Liability Insurance and Business Interruption Insurance. All businesses have unique considerations when it comes to Commercial Insurance(s).
What is Key Person or Partner Insurance?
Key Person or Partner Insurance provides lump sum payment to cover losses incurred if a key worker/partner in your company is seriously ill, injured or dies. It is also often used to ensure that in the event of the death of a partner in a business that their estate receives the share of the business without the surviving partner/s having to borrow. This protects both the surviving owner(s) and the family of the person in question.
How big are Insurance Payouts?
It depends on how much cover you’ve arranged and is directly tied to how much you’ve been paying as monthly or annual fees.
What do you do about existing cover? Am I already covered?
Insurance terms are usually fixed but when they’re up for review can be switched. If you don’t know if you’re covered ask your employer and check your bank statements.
What is a Review?
From the time you got insurance until now, the variables that affected your premiums may have changed, like the value of your house or your living expenses, you may have moved or had a promotion. An insurance review costs you nothing and can get you extra cover where you need it or save you money where you don’t require the cover.
Won’t the Government cover me?
For some things the answer is ‘maybe’. The public health system in New Zealand is great, but it doesn’t always accommodate you when you need it most, you’re leaving it to chance if you rely on it. The government will change from time to time and in the event of natural disasters won’t always be able to cover the costs of rebuild and supporting everyone. If you look at the Christchurch earthquakes you’ll see that years afterwards people are still dealing with the stress and uncertainty of underinsurance and being uninsured.
How do Insurance Companies make money?
There is a number of ways insurance companies make money. By taking on lots of customers and analyzing their risk profiles, they build in margin in the hope that the amount of total claims does not equal the total premiums collected. Insurance companies also have what is called “float” or available money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. Even if claims are more than premiums collected the insurance company can make a profit by investing well. As a side note it’s actually good for insurance companies to make profits because in times of disaster you’ll be more confident they can afford to pay claims.
How do brokers make money? How do you do business with a broker?
Insurance Advisers and Insurance Brokers do not usually charge fees because they’re paid by the insurance companies in two ways. There’s an initial lump sum and a smaller ongoing amount paid to the brokerage firm. While these amounts vary for different products and insurance providers it’s important that you’re offered a variety of insurance providers and you choose the product that fits your budget, your expectations, and from a provider you can trust. Getting advice from a broker involves submitting some information by email or in person that relates to your finances and personal situation. Over 1-3 meetings you’ll get advice and information to help you decide.
What about Online Insurance?
Does online insurance take into account all of your personal needs, plans and aspirations? When you're trying to claim insurance would you rather talk with a trusted and known person or a computer? Buying online can usually seem cheaper, but in reality you may end up paying for it, both financially and emotionally when it’s time to claim... So make sure you read the fine print. We won't insult your intelligence by talking about this further.
Can I afford Insurance?
It’s scary to not have insurance, it’s hard to part with money for something you hope you’ll never need, buying insurance is a balance between the fear of the unknown future events and the short term pain of giving up some of your savings and earnings.
What is General Insurance?
General insurance (non-life insurance policies), including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General Insurance includes House and Contents Insurance, Boat/Marine Insurance & Car Insurance.
What is House and Contents Insurance?
House and Contents Insurance, considered together or separately, are designed to cover the cost to rebuild and replace your home and belongings should disaster occur. This cover is only up to the sum insured and it’s important to determine the difference between replacement cost and value of items covered.
What is a premium? What are the ongoing costs?
The amount of money to be charged for a certain amount of insurance coverage is called the premium. Recurring fees apply and can change depending on the product and policy.
What is Insurance Fraud?
Insurance fraud is an attempt to deceive your insurance company to receive payment(s) that you do not qualify for under your policy. The punishments for this can include jail.
What is Income Protection Insurance?
Income Protection Insurance provides regular payments if you are unable to work due to accident or sickness. It replaces some of your income until you are fit to work again.
What is Underinsurance?
Underinsurance is not having enough insurance usually relating to an individual having some form of insurance that does not offer complete financial protection or replacement costs. For example if your house and contents insurance has not factored in your new jewelry and art work. Underinsurance results in you having to cover the difference when making claims which can be extremely stressful during ill health or when losing assets (like your house burning down).
What are the reasons you might consider insurance?
There are many reasons to look at insurance; protecting yourself and your family’s standard of living, ensuring the mortgage and other debts are paid off in tough times, ensuring your children's education is accounted for, paying off tax… the list goes on. Basically insurance protects your wealth but also protects your family. Your loss does not have to impact your family.
What are Investments?
Buying a property, vehicle or bach, changing jobs, getting married, educating your children and building up an emergency fund are all examples of investment decisions. There are a number of elements that play a role in each investment decision. The current economy as well as short and long term economic outlook – giving consideration to things like interest rates, exchange rates, house prices, the gold price and oil price – can influence the decisions of the individual investor.These are all important factors to consider but no one has control over these factors and therefore we believe it is more important to focus on those aspects that you as an investor can control.
What can you control as an Investor?
There are 5 main factors you as an investor can control and they’re explained below.
What is Risk?
Your appetite for risk is probably the most important factor. Every investor demands maximum returns by taking the lowest amount of risk. Higher risk investments normally lead to higher returns and lower risk investments to higher certainty of capital, but with lower returns. It is therefore important to recognise the compromise between protecting your wealth and growing it.
What is sufficient cash?
It is important for an investor to ensure that sufficient cash is available. For example, if you are looking to buy a business or a property, ensure there is enough cash readily available to put a deposit down. Liquidity of your investments is an important variable you can control.
What is Protecting against inflation?
It is essential that any investment must provide the investor with protection against the general increase in the price level of goods and services in an economy over a period of time. This will result in positive real returns (returns after allowing for inflation). In New Zealand, inflation has averaged under 3% since 1990, when investing you must take this into account.
What role does Tax play with investments?
Tax plays an important role when comparing investment returns on an after-tax basis. An investor should also consider how tax effective (or ineffective) different investment options are.
What does it cost to invest?
The Fees and Charges of brokers and firms can affect your investment returns and it is therefore important that you understand and compare fees that you’ll be charged. It could save you a lot of money in the long run. People we talk to often say they do not have spare funds available to invest, but investment planning involves more than this.
"WHAT'S THIS, WHAT'S THAT?"
This isn’t the complete story of how to buy insurance and how to invest… that would take volumes of words far beyond the above. All we have done here is try to get down some answers to the most common questions that are asked. And we have excluded a lot of things people are curious about that bear little relation to a program of prudent insurance and investment for most people.
In short you might want to know about stocks and bonds; buying, selling and trading them. You might want to know more about rolling your insurance and investment strategies into a concise long term plan. You may be curious about Kiwisaver and Retirement Investment planning. All of these things and more will be covered should you want to discuss them in your initial meeting.
While insurance can be expensive and certainly takes a chunk out of your budget, being without it could lead to financial ruin and stress for you and your family. The expense of not having insurance is nothing compared to the expense of living without it when the unexpected strikes.
If you have any questions about insurance or investments we’d be happy to answer them.
Bill and the team at Montage Financial Planning.