Covering Your ‘What-Ifs’

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The holiday season beckons and a new year dawns. As well as taking a well-deserved break with family and friends and (hopefully) enjoying some sunny days and tranquil nights, it’s the time of year when we tend to take a look at the year that was – what we have accomplished and the goals we’re working towards.

And while you pause and reflect, it’s also an opportune time to review personal risk and to think about your plan to safeguard those hard earned achievements, says financial adviser, Scott McRobie of Custom Financial.

First of all, how well informed are Kiwis generally, do you think, about how personal insurance works?

I think if someone is new to personal insurance, it can be pretty confusing without the benefit of some explanation as to how it works, and there are some lingering misconceptions about what covers what. For example, people mistakenly thinking that ACC provides the same cover as Income Protection; it doesn’t – ACC only provides relevant cover due to accidents, whereas Income protection can provide some replacement income due to both illness and accidental injury (as defined by the policy).

A big part of my role is helping my clients understand how the different types of personal insurances work – what they do and when they do it. Life, trauma, health, income protection and others – they all have different and distinct purposes, but often complement each other. For example, if someone experiences a health event, their health insurance may kick in to support fast access treatment, while their trauma insurance and/or income protection may kick in to provide financial assistance.

You talk about risk and insurance in relation to achievements: why is that?

People work incredibly hard to build their lifestyle – to buy a home, to afford the things and experiences in life that bring them happiness, to give their kids a great start. And of course, to create short and long term financial security. So whenever I first talk to a client, my job is to get a clear picture of what’s important to them – the people and achievements they may need cover for.

How do you get to that point – understanding what may need cover? What kind of questions do you talk through?

Everyone, and I mean everyone, is different. But in general terms, it’s really about taking a good look at some ‘what if’s’. And let me just say first up – these are usually pretty difficult to think about – not the kind of thing that anyone relishes – but they are nonetheless important to confront. And I’d also say, that in my experience, this part of the advice process delivers the all-too-often-unsung benefit of clarity – a really clear understanding of risk at a personal level.

So back to the initial question, depending on someone circumstances, we’d cover things like: If you lost your income, would you be able to pay the mortgage? If you suffered an event like a heart attack and needed time off work, would you be okay financially? If you were to pass, would your partner be financially secure?

So, next steps? You’ve talked and identified key areas of risk. Would someone cover every risk or just some?

Once again, everyone is different, and that includes tolerance and capacity for risk. Someone may choose to cover certain risks with insurance, and others they may choose to take on themselves – self-insure in other words.

Insurance is there to cover worst-case scenarios, so it’s really about honing in on what you really need. For example, for one person, taking time off work for six months due to illness and losing that income, might create significant financial hardship with knock-on effects on the mortgage and other financial commitments; whereas, another person might have savings or other capacity to take that time off without it creating the same financial issues.

You mentioned self-insurance – can you explain?

In a nutshell, self-insurance is where someone plans to use their own resources – savings, equity in the home, etc – in the event that one of their ‘what ifs’ comes to pass. So essentially they have looked at their financial picture and decided they are comfortable to take on that risk without insurance.

Of course, the idea of insurance is that you don’t have to dig into your savings and other financial resources, or amend your lifestyle. But I regularly work with clients who, after weighing up certain risks against their available resources, decide to cover some risks with insurance, and to self-insure others. The most important thing here, is to make an informed choice.

Any last comments?

Risk is a personal thing – we all have risk, but what that risk is and how you prioritise it is different. So it’s really important to first figure out what matters to you, and then assess your options, which may include insurance and may include an element of self-insurance. As I said: it’s a personal decision and everyone’s circumstances and needs are individual to them. So start by understanding your what-if’s and go from there.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.