Yes, we all think that this would be much better.
In life you can get away with buying some cheap stuff.
Cheap wine might not taste to great and may even make you ill, but it is unlikely to cause any long-term effect on you. Drinking cheap wine will also not have a huge impact on you or your family financially.
But some things like insurance can have a huge impact and with products like insurance you may not know how bad it is until many years later.
The reality is cheap insurance is expensive – if you have paid premiums for years and then it does not pay at claim time when you really do need it to work for you.
What I Have Learnt About Buying Cheap Insurance
My name is Stuart Wills and I have been working in the insurance industry for just over 15-years but more importantly have had my own insurance policies since leaving school. I therefore both earn money from insurance companies and pay money to them personally.
Over the years I have dealt with many claims on behalf of clients and also had claims myself and within my family. I have also seen programmes like Fair Go that have some seemingly shocking stories where it looks like insurance companies are wiggling out of claims due to what appear minor and unfair reasons.
Two things that I have learnt and which continue to be reinforced are;
- Cheap insurance typically is cheap for a reason
- Simple application forms are dangerous
Let me expand on this and explain what I mean with these two statements.
About Cheap Insurance
Often we talk to people who have been sold insurance that appears cheaper than other policies that they have been recommended. I had a lady today that told me she could get cheap insurance through her bank and it might appear cheap.
We also see and hear the advertisements that promote cheaper insurance premiums.
Now, I know that we all like to get a bargain and most of us think that insurance companies make too much money by charging us too much. I too like to make sure I am not paying too much for insurance of any other product, but I also know that the saying “you get what you pay for” has some truth to it.
With most purchases we will want to get value for money, which means we want a good balance between price and quality. You want a product that is going to work well but also not send you broke. Most of us know that a $5 bottle of wine is probably not as good as a bottle you pay $15 for, and then the $50 bottle will probably be better again. We may not be able to justify the $50 bottle, but most of us will want something a bit better than the $5 bottle too.
Insurance is a little different.
When you buy insurance you are buying a policy that has the “promise” or more precisely a contract. This policy document (contract) details what financial compensation the insurance company will provide you in the event that something happens.
The biggest problem is that to most people these policy documents are too complex so they assume that they are all pretty much the same. Furthermore, when you are sold the insurance by most banks, insurance companies and even “so called” insurance brokers (advisers) you are provided a very bias opinion and therefore recommended the policy that suits them…. not necessarily you.
Insurance policies do vary a lot and even though they may be promoted as similar products they are quite different and therefore they work very differently when you actually need them – at claim time. If you have the wrong policy you may not find out until claim time when you are told why it is not going to pay you what you had expected.
Consider Mortgage Protection Insurance
Just about every bank and insurance company has a Mortgage Protection Cover which they promote and to most people they think that they are all the same or very similar, but they are not!
Most Mortgage Protection Covers will have a component of Life Cover that pays off your mortgage should you die, and then some will cover you also if you get diagnosed with a terminal illness, a critical illness (trauma condition) and may the repayments for a period of time should you be unable to work.
Initially the major concern for most people is they want to leave their family with no mortgage should they die but little consideration is given to all those possible events where you can lose your income and therefore not be able to pay your repayments.
Most people could not survive and pay the mortgage for 6-months on a sickness benefit of $170.90 per week and would definitely loose the house to a mortgagee sale if they were still off work in 2-years, 6-year or never able to work again.
But people think that they will always be able to work.
Statistics show that in New Zealand 40% of males and 60% of females will be unable to work for more than 30-days for health reasons and 50% of these people will be aged between 30-years to 50-years old. The worst statistic however is that the average amount of time that people spend on an income protection claim is just over 1-year.
I would therefore ask you again; could you keep up your mortgage repayments and other household expenses if you were forced onto a sickness benefit of $170.90 per week?
This is a pretty compelling reason to make sure that your Mortgage Protection Cover or Income Protection Cover will properly protect you.
Maybe it also emphasises that a “cheap” insurance cover might not be quite as important as knowing that your insurance cover will actually support you at claim time!
Simple Insurance Applications
We all hate filling out long forms for insurance or anything else.
I have learnt over the years that insurance companies didn’t invent long forms for no reason. Sure we have seen short-form applications and online applications for insurance, but in my opinion nothing beats the long application forms.
To understand what I mean we need to consider what happens at claim time and what causes most claims to be declined or not paid in full.
Painting a Picture
The insurance company is expected to provide you financial compensation (pay a claim) at any point in the next ‘say’ 30-years and therefore need to assess you to ensure that they price this correctly for both you (the policy owner) and also for their shareholders.
We do not want to see another AMI scenario where the insurance company has priced the policies wrong (cheap insurance) and goes broke and therefore is not around to pay your claim. With AMI the Government came to the rescue, but I would suggest that was an extraordinary case and it was more about the people who suffered due to the earthquake than actually wanting to help out an insurance company.
Remember the insurance company can only make an assessment on you with the information that you put on the form and any additional information that they may request from your doctor, or tests they may request. We want to ensure that all applications are properly assessed so that the claims process runs smoothly and the only way we can ensure this happens is to provide the insurance company with full information at the outset.
You cannot paint a full picture on a 1-page application and therefore the insurance company will either over-charge you to cover their potential risk or leave it until claim time to fully assess you. The stress of having your application re-assessed at claim time is something that everyone should avoid. It is better to deal with the application fully while you are fit and healthy that try to deal with this when you are unwell and stressing about your health and finances.
Non-disclosure is the biggest reason that claims are not paid.
Insurance companies expect you to disclose everything to them on the application and may decline your claim if they find that something was not disclosed whether it seems relevant to the claim or not.
Each application form will mention your duty of disclosure within the declaration that you sign, and while you may not read it, it is there and the insurance company is quite entitled to decline a claim on the basis of non disclosure.
Short-form and online applications will contain a question that reads something like “have a question that asks “if you have had any illness, injury, medical examination, advice or treatment?”
Do not ignore the importance of this question!
You may have visited your doctor for a headache, a mole, had an abnormal smear or been told your blood pressure is slightly higher than it should be. Any of these seemingly minor health issues could give the insurance company a reason to decline your claim.
I know it can seem like a major exercise to fill out these long insurance application forms and to provide all of the supporting information, and I know at times it seems like you are paying too much in insurance premiums.
But there is a reason.
You want to know that there will be no issues at claim time – you will want your claim paid!
If you are going to spend any money on insurance you want to know that you will receive your financial compensation at claim time when you and your family need it most. A good insurance adviser (like myself) will ensure that you get good value and the right types and levels of cover plus they will be there to work with you to amend things as required.
You really don’t want cheap and easy … you want good value.