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Sickness could destroy families: FSC

Personal insurance is recovering well from the recession, statistics from the Financial Services Council show.

Tuesday, March 12th 2013, 6:00AM 8 Comments

Annual premium income is expected to reach $2 billion in the next quarter on current trends.

And the amount of money in the economy from insurance payouts has grown by $230 million over the past three years.

In the year to December 2012, total personal insurance payouts for life insurance and income replacement insurance were $1.19 billion, 16.6% up on the year to December 2011, when payouts crossed the $1 billion mark for the first time.

Premiums in force also rose by $120 million during the year to a total of $1.96 billion.

But the council said New Zealanders were under-insured for loss of income from sickness. 

Financial Services Council chief executive Peter Neilson said a two-year research project by the FSC showed just 15% of households had income protection insurance.

All were covered for the possiblity of an accident by ACC, but they were more than twice as likely to suffer a serious illness.

Neilson said: “Each year 15,000 primary income earners fall seriously ill and are unable to work for six months or more. For a person on the M tax rate, the sickness benefit is $341.60 a week and this is means tested. If another person from the household is earning income, many families find they are too rich to get a household income tested sickness benefit, but too poor to pay the rent, mortgage or food bills.”

He said most Kiwi families would not be able to pay their mortgage or rent four weeks after using up their annual or sick leave.

For someone on the M tax rate, the sickness benefit is $341,60 a week, means tested.

Neilson said: “If another person from the household is earning income, many families find they are too rich to get a household income tested sickness benefit, but too poor to pay the rent, mortgage or food bills.”

Good Returns looked at some of the statistics in detail here.

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Comments from our readers

On 15 March 2013 at 12:50 pm Graeme Lindsay said:
What a startling statement of the obvious!

There is one very good reason that the majority of households don't have Income Protection insurance - They can't afford it! It's the same reason that the majority of households don't buy a new BMW each year.

So, Mr Neilson, I hope that your 2 year study didn't cost you too much, but the solution is in your members' hands:

Produce Income Protection cover that is affordable to the 85% of households, or stop bleating! The advisers out there are advising people to buy, but you can't get blood out of a stone - for many of those households, just meeting the mortgage payments and feeding the family is a challenge, and the professional adviser is not going to persuade a client to buy Income Protection insurance today and have them default on their mortgage tomorrow!
On 15 March 2013 at 3:47 pm Johnny said:
That's somewhat simplistic Graeme, but cost is certainly a factor.

I'd suggest equally or greater a road block is simply fear-or lack of it; there isn't enough fear of the consequences of disability in this egalitarian socialist welfare paradise we live in.

If there was, that stat would be the other way around.

Why else would more people have Sky TV than income insurance?
On 15 March 2013 at 4:20 pm Graeme Lindsay said:
Hi Johnny

Probably best described as ignorance! Sky TV is instant gratification! It takes character to buy insurance - i.e. to sacrifice current consumption (Sky TV, etc) for possible future benefit!

I'd agree - ignorance, i.e. they don't know about IP insurance, or cost, i.e. they do know but are not prepared to sacrifice the cost from current consumption, would account for the majority of uninsurance. Then, there's probably a small portion uninsured as they're uninsurable!
On 15 March 2013 at 4:55 pm Giles Thorman said:
Cost is the major factor;if it were free then everyone would have it.

Having said that there is a perception in this wonderful country that we live in that people are impervious to illness or death and they all have a very large "S" emblazoned on the front of their shirt; it is someone else's job to be ill or dead.

I believe people will buy house insurance as they do not mind considering the possibility of their house burning down, however they do NOT want to think about death or illness, particularly when it is their own!

As for the Sky TV query, come Friday night when the footy game is on I think you will find that an Insurance Policy that promises all sorts of "things" when one is ill or dead is not going to hold a candle to watching your favourite team; no matter how much you back up either the Ambulance or the Hearse.
On 17 March 2013 at 4:50 pm Dr Mike Naylor said:
The reasons why most middle-income NZers do not buy any Income Protection, (far lower than in comparable countries) is one of the key questions for the industry. Clients are left destroyed and insurers could sell 3 as much. The FSC and people like myself can look at the macro-picture, but some feedback from those at the client-end is essential. Ideas:
I-P is comparatively expensive, and only suits the middle/upper income and aged below mid-50's. However these people fully insure for house/ car/ travel/ life etc, and often medical. But not IP? Its not really high a percentage of income either. Cost is not the main issue as they would never consider not buying house insurance because of cost. It strikes me as more of an excuse - Sky or alcohol costs more. We're not talking about the lower-income - their income is close enough to WINZ payments for it not to be required. We're talking about intelligent middle-class people who do choose to do forward thinking things like save for retirement.

Is it really that they don't like thinking about permanent disability?
Do they not know about the product? Do they not think about the risk? Do they think that ACC covers sickeness? Do they think that welfare payments are not as low as they are? Surveys have included all of these as responses.

One of the responses that struck me from the FSC survey was 'I brought I-P after the family of a friend was forced to sell their house due to sickness - I'd never thought about it before.' There was no question of cost in that respondent's mind - the consequences of not looking after their family were too graphic. Its not a BMW product.

Current methods are not working - the industry needs new methods. The product can't be made much cheaper, traditionally profit margins have been low or negative.
On 18 March 2013 at 12:30 pm Broker said:
Hey Dr Naylor I like your comment (first time for everything ah?) - you are asking questions of the advisers who are at the coal face - shows good listening skills..well done...

Income protection is expensive, especially when you are getting close to or over 50. Even high income earners think it is expensive. What's the reason most people look at income protection - to protect the mortgage. I think you'd find most advisers are selling mortgage repayment cover as opposed to income protection - premiums are cheaper and no ACC offsets.

Statistics tell us that most long term disability is due to sickness not accident BUT kiwis relate more to having an accident - and hate the fact that income protection is offset against ACC benefits.

By recommending a lower premium mortgage repayment cover it also allows some spare funds for other types of cover - life, trauma etc...fits within the 'personal risk insurance' budget.

Just some personal observations of someone out there at the coal face. Hope it helps. Cheers.
On 18 March 2013 at 4:56 pm Johnny said:
I'm not convinced that cost is the major factor in the clients mind, but may be in the advisers mind often times.

In my experience most people haven't a clue what IP costs. For the under 50's (just like me) an excellent IP contract can be down to 1-2% of gross income for the 30's to 40's, and 3-4% for the 40's to 50's.

That's not big money at all. A 35 year old on $75K struggling to afford 1%(and even a tax deductible 1% at that) just seems like poor spend prioritization.

Had the employer offered them $74,100 plus unlimited sick-leave or $75,000 and 5 days sick-leave, which would you have taken?
On 19 March 2013 at 12:05 pm Just Another Financial Adviser said:
I think Broker is on the button here. Cost is a factor, but also Simplicity and Trust.

IP products are pricey and come with complexity and suspicion about whether they will pay. Offset clauses, long wait periods and cynicism about whether an insurer will truly pay a benefit to age 65 all add up to lack of transparency of promise for many potential customers.

Make it simple - if you can't work due to illness or injury we will pay you X, no if's buts or maybe's. I suspect Mortgage Protection insurance is closer to this than IP.

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