The case for KiwiSaver insurance

When looking at any investment, it pays to consider risk. But curiously, some people don't think so.

Tuesday, July 6th 2010, 3:43PM 6 Comments

by Russell Hutchinson

Take education. Whether or not you pay directly for it, it's expensive. Even if, as a child, you don't have to fork out for it personally, the years between 18 and whenever you finally finish burning couches could have been filled with making money. Instead you get a piece of paper at the end that says, well, maybe, that you might be worth more than the next snotty applicant.

What if you go through all the hard work but don't get the high income because you become disabled?

Insurance could help.

This is how insurance is connected with investment. Usually any investment requires you to take a risk, and risks can be covered.

KiwiSaver is like that too - you lose 2% to 6% of what you could have had in your pocket or as extra remuneration and you stick it in a fund where you can't get at it. It's not as useful as your other savings because you can't borrow against it, you can't borrow some to meet unexpected bills, and you can't do anything with it until you are 65 (presently, maybe older...)

Here's a recent case of a KiwiSaver investor:

...a member who had a brain haemorrhage and now suffers seizures and can't work or drive was twice refused permission to withdraw his KiwiSaver money under the serious financial hardship and serious illness clauses. On his third attempt, with the help of a consultant and some media attention, the trustee approved the withdrawal...

You can imagine how much was in the KiwiSaver can't you - probably less than $10,000. That won't last long. A little income insurance - even just $30,000 a year paid after 90 days wait would have been enough to make all the difference.

Right now I reckon that there's about 800,000 people who got their KiwiSaver by default and for most of them, when they stop working, so will their KiwiSaver.

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Comments from our readers

On 7 July 2010 at 11:04 am Liz Tentoo Wisdom said:

This is a winning suggestion! Russell deserves nothing less than a knighthood for it.
I am all for financial incentives for people to have proper risk insurance in place to protect themselves and their families from financial hardship in event of death or disability of a spouse or breadwinner.
Who could resist adding their much needed Income protection and life cover into Kiwisaver and consider it to be paid out of tax credits and employer payments?
This would result in less burden on the government also as the insurance company would take care of some of it.

On 7 July 2010 at 11:25 am Mark Jory said:

A similar idea would be to insure your KiwiSaver contributions, so if you are disabled and off work, after a stand down period your contributions to KiwiSaver, inflation adjusted yearly, could continue. Because you are not insuring your whole income, the cost would be low and could be funded from your KiwiSaver contributions - this might require some legislative change to allow this. Or it coudl be done seperate to KiwiSaver.

For Life companies, it would provide them with a competitive edge over purely investment companies offering KiwiSaver.

As Default providers cannot market to their KiwiSaver investors, it would also provide an impetus to get people out of low-risk low-returning default funds.

Even if you are an employee and you stop working due to disablement, your contributions would continue - through to age 65 - and so would the govt contributions, you would only be missing out on your employer contributions.

This effectively insures your KiwiSaver fund and for many, the source of the majority of their personal retirement income funding.

On 8 July 2010 at 1:19 pm Majella said:

I well recall, in the mid-90's a certain well-known Christchurch-based BDM for a certain insurance/investment company showing how Waiver of Premium could be added to the unitized savings products they offered. Wow! If you were putting in $300 pm, and added waiver, you could while claiming on your IP contract, also suck as much as made sense to, from the bottom tap on your (non-locked) savings plan, which was being topped up by the Waiver benefit. Simple enough, and not expensive at all.

Russell's idea is that one can have all (or the major part) of your insurance funded by the money contributed by Kiwisaver subsidisers - employer and IRD - (Liz Wisdom) while still also insuring your on-going contributions (Mark Jory).

Who would NOT offer this add-on, if it were to be legislatively sanctioned? Even the 'pure investment' outfits would source a provider (who would be clamouring to get at the business).

On 8 July 2010 at 1:26 pm majella said:

Then again, the Australians are already considering this, and wnat it offered by teh Trustee ..and guess what? No commission
http://riskinfo.com.au/news/2010/07/06/cooper-review-the-other-insurance-recommendations/

On 12 July 2010 at 8:27 am Garry H said:

Insurance in Kiwisaver would be a great idea. In Australia you can get life and TPD insurance bundled into your savings. Due to the favourable tax environment (which is sadly lacking here) the premiums are much cheaper. Two issues to look out for though are:
1) Insurance premiums can eat up the savings. It is important to ensure that that contributions can cover it; and
2) Superannuation falls outside of estate planning (i.e. it can't be willed). A binding nominaiton needs to be made on the super to ensure that any life payments go to the right parties.

Still, using Kiwisaver as an insurance policy is a step in the right direction. Hopefully if the uptake continues the way it has, there could be a good opportunity to campaign for such features.

On 14 July 2010 at 4:15 pm denis said:

Overall, experience has told us that any hybrid of insurance and savings wrapped up together in one product ends up being an inferior version of both. People that never make an insurance claim grumble about the terrible investment returns (because insurance premiums have been deducted) and those that do claim grumble about the low level of payout under the insurance.

My instinct would be to learn from those past mistakes and keep the two disciplines entirely separate.

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