With the rising cost of living in New Zealand, many individuals are feeling the squeeze when it comes to balancing their budgets. As financial pressures mount, the decision to hold onto or cancel personal and life insurance policies becomes a critical topic. While cutting these policies might provide short-term financial relief, it often leaves you vulnerable in ways that can have far-reaching consequences.
Rising Financial Pressures on New Zealanders
Recent insights from economist Shamubeel Eaqub, who addressed the Financial Services Council (FSC) conference, shed light on the affordability crunch New Zealanders are facing. Eaqub emphasised that the average family spends approximately 14% of their total income on insurance, including life, health, contents, and vehicle cover. This is in contrast to the 20% spent on food and 26% on housing and utilities. With insurance taking up a substantial portion of household income, it’s easy to understand why many may consider it a luxury they can’t afford, especially when other costs are rising.
According to Eaqub, only 29% of New Zealand households have life insurance. Currently, only a third of households have a mortgage, with 137,000 of these considered "very stressed" financially. Meanwhile, another third of households are renting, and the remainder owns their homes outright, without a mortgage.
This shifting landscape indicates that the life insurance market is shrinking, and with changing demographics, insurers may need to rethink their strategies. Younger families and culturally diverse groups will have different needs and values, meaning that insurers must adapt their products and marketing accordingly. But one thing remains clear: affordability will continue to play a significant role in determining whether people take out and maintain insurance coverage.
Short-Term Gain, Long-Term Risk
When faced with financial hardship, cancelling personal or life insurance policies can seem like a quick and effective way to free up cash flow. However, the implications of this decision often go beyond the short-term savings.
Consider the consequences:
Loss of Financial Safety Net: Life insurance is designed to provide a financial cushion for loved ones in the event of death or serious illness. By cancelling it, you leave your family exposed to financial hardship at a vulnerable time. This is particularly crucial for individuals with dependents, mortgages, or other significant financial obligations.
Increased Risk of Medical Costs: Health insurance provides coverage for medical treatments, and having it often means faster access to necessary care. Dropping your health insurance could mean longer wait times for treatment or facing hefty out-of-pocket costs in the event of an illness or accident.
Reinstatement Costs: If you cancel a policy and later wish to reinstate it, you may face higher premiums or may no longer qualify for certain coverages based on your age or changes in your health status. Essentially, insurance only gets more expensive as you age, and waiting to repurchase it can cost more in the long run.
Real-Life Impact: A Cautionary Tale
There have been cases in New Zealand where policyholders cancelled their life insurance due to financial hardship, only to face devastating consequences later. While specific cases are often not widely publicised for privacy reasons, as financial advisors we hear stories of clients who, after cancelling their insurance, faced unexpected illness or death, leaving their families with significant financial burdens.
For example, a young couple might cancel their life insurance to save on monthly costs, only to face a sudden tragedy where the primary breadwinner passes away. Without life insurance, the surviving spouse could struggle to pay for the mortgage, cover children's education, or manage daily expenses. These real-life scenarios underscore the importance of keeping adequate coverage to avoid leaving loved ones in a financially precarious situation.
Balancing Affordability with Protection
So, what can you do if you are facing financial hardship but don’t want to leave yourself exposed?
Here are a few considerations:
Review Your Policy Regularly: Meet with a financial advisor to review your insurance coverage and needs. You may find that your policy can be adjusted, or you could switch to a plan that better fits your budget while still providing essential protection.
Look for Cost-Saving Opportunities: Some insurers offer multi-policy discounts or flexible payment options that can help reduce the cost of premiums.
Prioritise Critical Coverages: If you must reduce coverage, prioritise policies that are most critical, such as life insurance for breadwinners, health insurance to cover medical emergencies, or income protection to safeguard your ability to earn.
Conclusion
The affordability crunch on personal and life insurance is a real and growing issue for many New Zealanders. While cancelling a policy can provide short-term cash flow relief, it is crucial to weigh this decision against the potential long-term risks of being uninsured. Ensuring that you have appropriate coverage is not just about protecting your finances; it's about safeguarding your family's future.
If you’re struggling to balance your budget while maintaining your insurance policies, reach out as we can guide you in making informed decisions. Give us a call on 0800 005 676 today. Remember, the goal is to strike a balance between affordability and comprehensive coverage to ensure you're not left vulnerable when life’s unexpected events occur.
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