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KiwiSaver and Insurance: Assessing lifetime financial needs

As we approach a significant debate on whether insurance should be integrated into KiwiSaver, I personally feel we should shift our focus towards a more fundamental and engaging topic: the assessment of financial needs for one's entire life.

Tuesday, April 9th 2024, 6:00AM 2 Comments

by Russell Hutchinson

Regardless of individual stances on KiwiSaver's expansion, the conversation invariably leads us to the concept of indemnity and lifetime financial planning. This is the space where we realise just how much closer to risk management planning superannuation is, than, say, investment management.

First, we seek to understand indemnity. Indemnity, the principle of being restored to a pre-loss financial state, is achievable monetarily but often unattainable in physical terms. Let’s set aside temporary disabilities and consider permanent ones that preclude participation in the workforce. Such scenarios necessitate a financial buffer substantial enough to cover a lifetime, just like superannuation:

The combined total of your income cover, total and permanent disablement, and trauma insurance should be sufficient to sustain you for the rest of your life. This need correlates with the purpose of superannuation savings; to provide financial security throughout your post-retirement life. Both assessments are complex, hinging on factors such as work duration, lifespan, savings rate, and expenditure. Since these variables are largely unpredictable, estimates and scenario planning play a critical role. All will be highly sensitive to these assumptions.

Insurance products adeptly manage several aspects of this financial equation. Adequate insurance coverage ensures that even an early onset of disability doesn't derail financial stability. Conversely, investing for retirement is a long game, requiring time and consistent effort. A practical approach often involves starting with substantial insurance coverage, which is gradually reduced as wealth accrues, allowing increased contributions to retirement plans. This transition reflects a convergence of insurance and investment needs, employing similar planning tools, such as 'real-age' calculators. These tools offer a nuanced view of life expectancy, aiding in more accurate financial planning. If trauma or disablement reduces life expectancy, that should be considered in the planning for retirement.

Revisiting the Debate Over KiwiSaver Inclusion

Given the interrelated nature of insurance and retirement planning, some argue for their integration within KiwiSaver. This perspective, however, does not fully credit your role, in providing financial advice. You already have the opportunity to provide holistic services that encompass both retirement planning and insurance needs, some of you already do. Many, though, limit them to no-advice or very limited scope services, which I think probably undersells the value of what you do. Tailoring these services to individual client requirements ensures a comprehensive approach to lifetime financial planning. Let’s first encourage people to seek the solution that exists.

The debate over KiwiSaver's expansion into insurance is more than a policy discussion; it’s about understanding and planning for life's financial journey. While tools and estimations provide guidance, the expertise of financial advisers is pivotal in navigating this complex terrain. Automatically including “x times income” life and TPD may cause as many problems as it solves and may add to that the hazard of reduced advice-seeking. Advisers are uniquely positioned to consider the entirety of a client's financial picture, crafting strategies that balance insurance needs with long-term investment goals. This comprehensive approach empowers clients to make informed decisions for their financial security, both now and in the future.

Tags: Russell Hutchinson

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Comments from our readers

On 10 April 2024 at 8:38 am dcwhyte said:
Absolutely 100% Russell! Specifically, the danger around integrating the contribution towards life cover via a contribtuon based on a fixed percentage of income consigns the retiremet fund to slower accrual the older the member gets. In periods between jobs - happening more frequently these days apparently - the cost of the life cover is met by the fund, again impairing the growth rate. In the Australian market, life cover was effected at 1x or 2x salary within the Super Fund - hardly adequate for the average family wage-earner to protect dependents. However, when questioned about their life insurance levels, many Australians claimed to have sufficient financial protection from their Super Fund - not a healthy outcome. I saw cases in Australia where older scheme members had the value of their funds drastically reduced following extended periods of not working (and therefore not contributing) due to the fund being used to maintain the nominal level of life cover. OK, I admit that the Aussie Super structure is employer-based, but isn't that something we should be looking to encourage here?
On 3 May 2024 at 9:00 am Steve Wright said:
Totally agree, but for me the concept of lifetime financial planning can be narrowed down and must also include 'lifetime life and health insurance planning'.

This requires advisers to consider client's risk and likely insurance needs (including future affordability and access to products) not just in the immediate, but right out to, and beyond retirement.

Careful product and provider selection can ensure greater flexibility to make changes over time as needs change, health declines and premium costs rise.

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