The pitfalls of life insurance

RICHARD MEADOWS

Jane Hall says her father Leslie was a "loving and wonderful man".

After being diagnosed with a brain tumour in 1996, he was given three to six months to live.

Leslie's illness stopped him from communicating, meaning his family had no idea he'd cancelled all his life insurance policies just four months beforehand.

When he died shortly afterwards, the grieving process was made even more difficult by the unexpected shock of losing everything.

"We had to find money for even a funeral - we didn't have anything," says Hall.

"The man who had always been the rock in our family had failed us at the last moment."

Today, her elderly mother rents a tiny one-bedroom house that "you couldn't swing a mouse in".

"She's struggling for money, and she's just turned 80," says Hall.

"Why would anyone want to put someone in that situation?"

This grim lesson is the reason why you'd be hard-pressed to find anyone more passionate about life insurance than Hall.

As a financial and insurance adviser at Getalife NZ, she wants us to learn from her dad's mistake - and from the mistakes of hundreds of other clients.

Last week, we covered the basics of life insurance - who should get it, how much, and what type to buy.

This week we're identifying the top pitfalls you need to avoid so you don't leave your loved ones in the lurch.

1. Cancelling when times are tough

Hall says she can't count the number of times she's seen people cancel policies, only for disaster to strike just weeks or months later.

Her own dad was trying to get on top of mounting bills, but hadn't talked to anyone.

"Even if he had only had enough to pay for the mortgage, the difference to my mother would have been enormous," says Hall.

Insurance premiums can be expensive, but it's better to explore all options before doing anything drastic.

2. Going it alone

It's absolutely vital to go and see a financial adviser or insurance broker, says Hall.

Working out the best coverage for you is the easy bit. A broker's real value lies in fighting your corner when it's time to collect.

"That is what we're paid for," says Hall. "We don't sell insurance - we sell claims."

The layperson simply doesn't have the experience to navigate the complicated contracts and arcane practices of insurance companies.



　

Hall says a good adviser will fight "tooth and claw" for you, spending hours on the phone or in person to make sure everything goes smoothly.

3. Choosing a bad broker

That being said, you need to choose carefully.

Insurance is the one area where even independent advisers are still paid through commissions, rather than charging a fee.

"A broker will usually get a higher commission if they sell most of their business through one insurance company," says Hall.

This is incredibly important, because the difference in premiums between companies can vary by more than 50 per cent.

Hall says you need to ask your adviser exactly what relationships they have.

Request a disclosure statement if one isn't offered to you, and check they're registered by searching here.

Hall even suggests asking if you can call previous clients for references. This is not a relationship to be taken lightly, so do your homework.

4. Being under-insured

"In all my years as a financial and insurance advisor, I have never handed a grieving loved one a cheque that contained too much money," says Hall.

Most people don't realise they're under-insured until it's too late.

Circumstances change over time. If you're on a renewable annual policy, re-assess the amount of coverage you need each year.

5. Being over-insured

You need to find the Goldilocks zone when buying insurance- it has to be just right.

You don't want to be caught short at claim time, but you also don't want to be wasting money.

"I've seen people who have $2m or $3m worth of life cover and nothing else," says Hall. "If they become sick, what's going to happen?"

ACC doesn't cover illness, so you'd probably end up losing your house and having to cancel the life insurance anyway.

It's important not to go overboard in any one category, and be sure you have a balance of trauma or income protection insurance too.

6. Letting lawyers get involved

Nothing adds to the stress of a family member dying like lawyers circling during a time of financial difficulty.

One of Hall's acquaintances lost her husband after a major heart attack. The policy was recorded in his name, which meant it was dealt with as part of his estate.

The money took nearly 18 months to come through, and legal fees ate up $25,000 of the modest $150,000 policy.

Hall says you need to make sure the policy's beneficiary is actually named or jointly named on the document.

"[That way] the surviving owner will get the money immediately. There's no lawyers involved."

7. Fudging your history

When you first take out life insurance you'll be asked a bunch of probing questions about your age, health and medical history.

Pinnacle Life partner Ed Saul says you need to answer fully and honestly.

No matter how tempting it might be to get cheaper premiums by knocking 10kg off your weight, it'll come back to bite you on the bum.

"If you die of lung cancer but you declared you were a non-smoker, they'll want to look into that," says Saul.

In many cases, all it takes is a trawl through your medical records.

The website of the Insurance and Savings Ombudsman (ISO) is riddled with case studies of claims that were declined because of non-disclosure.

Often they relate to things which applicants simply didn't think were relevant or worth mentioning. If in doubt, disclose it.

8. Pre-existing conditions

Insurance companies will often exclude any pre-existing health problems you have, so you need continuous cover.

If you're changing providers, don't cancel your old policy until you're covered with the new company.

9. Not reading your contract: Adrenaline junkies

Common exclusions include refusing to cover deaths caused by extreme sports, like mountain-climbing or hang-gliding.

There's not much adrenaline junkies can do about this, expect perhaps see if you can find a more tolerant insurer.

10. Not reading your contract: Boozehounds

The same can apply to alcohol-related deaths, so make sure you know where you stand.

Judy (not her real name) died in 2011 after falling down a flight of stairs at home.

The insurance company rejected her hubby's claim because she was under the influence of alcohol - a specific policy exclusion.

He tried to argue that alcohol hadn't contributed to Judy's death, but the autopsy found she had a blood alcohol level three times the legal adult driving limit.

The dispute went to the ISO, which ruled in the favour of the insurance company.

If you recognise you're a big boozer and could meet your end in the bottom of a bottle, then maybe it's worth looking for a less puritan policy provider.

11. Not reading your contract - Speed demons

There's another common exclusion for any illegal activities. It's fair enough that you won't be covered for gangland gun battles or a fatal cocaine habit.

But even the most borderline behaviour can be classed as illegal.

In 2003, Madeline died in a car crash when her vehicle left the road. Her insurer declined the claim on the basis that she was driving too fast and in a dangerous manner.

When the ISO reviewed the deposition, it found there was no conclusive evidence that Madeline was speeding.

However, it still decided she was driving in a way which was, "or might have been", dangerous to the public.

The claim wasn't upheld.

Hall says the vast majority of life insurance claims do get paid out.

"You only hear about the claims that don't go through. There are thousands and thousands more that do."

Nevertheless, it's important to know the various ways in which insurers might try to wriggle out of paying.

You also need to make sure you don't blot the copybook - leaving your family up the proverbial creek in their time of need.


- © Fairfax NZ News