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The Approved Personal Risks Insurance Guide
Of all the insurances, Income Protection is considered by many to be the most
important. The financial risks of time away from work or business, due to illness
or injury are significant and very real. The financial costs would be devastating
for all but those people with considerable net worth or disposal cash.
The most common reasons for purchasing Income Protection is to secure an ongoing source of personal income and so protect your ongoing finance and lifestyle.
You may have heard of the phrases "Your ability to earn an income is your
greatest asset". We certainly support this concept as it is our incomes
that fund our homes, lifestyles, family
it simply makes sense to protect
This feature aims to provide greater certainty when a claim occurs, by providing the selected insurer with evidence of your client's actual 'personal income' now, along with the required health, occupation and pastimes information.
Agreed Value policies are slightly more expensive, however remove the significant delays that can occur in securing a claim settlement on a traditional policy. This aspect is particularly important for self-employed income earners.
For this large group of clients, the added complexity of 'income tax strategy', means any attempts to fully show the real level of personal income, particularly while ill or injured, further increases their risk and potential claim delays.
Agreed Value policies, also provide greater protection against possible fluctuation in income.
Traditional policies require evidence of a loss of income at the time a claim occurs. It is found this to be very difficult for self employed clients, particularly when they are suffering an illness or a serious injury.
To secure Agreed Value coverage, leading insurers require two to three years
of financial statements showing what your client's personal gross income was.
Salary (before tax)
Note: (1) Do not confuse drawings with income or salary. Drawings are funds
extracted from the business in cash or in goods and services by the owners in
anticipation of profits. In practice however, owners drawings may be significantly
more or less than the net profits generated by the business i.e. Owners may
be drawing capital, although they may not always realise. Insurance providers
therefore do not reconise drawings as income and will not consider it as part
of assessing the income to be covered. They may investigate or query it where
the drawings are excessive.
This type of cover provides this vital protection, on a very sound basis for salary and wage earners. Agreed Value is also available and maybe suitable in many situations.
The incentive always remains to return to work as only a maximum of 75% gross income can be insured. This figure would become a tax assessable income should a claim be made.
Premiums paid are tax deductible.
Please note that evidence of income is required at the time a claim is made, showing your clients loss of income and any other benefits being received i.e. ACC, WINZ, and Income from other Income Protection Cover. Note: An Insurance provider will not normally allow full cover where there is an exiting Income Cover already in place - only the top up if any.
Life companies only offer guaranteed renewable policies. However, Fire & General Insurers continue to offer "accident, illness and injury" policies that are insured on a 'cancelable basis'. These policies are often sold to sole traders and sometimes individuals. They effectively provide the clients insurer with the ability to cancel or alter the terms of a policy based solely on any changes in a clients health, occupation or pastimes situation.
We do not recommend cancelable policies. Only in situations where a client is unable to secure a superior option are these policies suggested.
Life Insurance insurers cannot alter Guaranteed Renewable policies. Even the premium rates can only be altered across their whole pool of clients.
The only condition is that premiums are kept up to date.
Wherever possible we advise clients to consider coverage payable to age 65. This effectively means, minor through to major health problems and financial losses, are insured.
Options ranging from 'to age 65' cover with lifetime extensions; down to one year benefit payment periods are available.
'To age 65' coverage, can mean
· A 35 year old Consultant earning $100,000 pa gross, is at risk of losing $3,500,000 over 30 years*.
· A 45 year old Business Owner producing $150,000 pa of personal gross income, is at risk to $3,000,000 over 20 years*.
*Not including inflation or increased earnings.
Definition of Disability
This critical aspect differs amongst all insurers. Leading insurers provide a wording very similar to the following. We highly recommend wherever possible clients purchase coverage containing this wording or similar.
Your client is under the care of a registered medical practitioner, who has certified that the client is so disabled by illness or injury that they are ;
unable to follow the occupation or carry on the business which they are involved in, for more than 10 hours per week and;
they are not working or engaged in any other occupation.
Tax deductibility of Income Protection insurance premiums is available in most situations. It also needs to be noted to clients that where they do secure a tax deduction, any claim amount received becomes tax assessable income.
All clients should be advised to seek the assistance of their tax advisers to ensure the most suitable allowance is made.
With the changes to the IRD's processes, it is important clients provide a
tax deduction request to the IRD. An Insurance provider can arrange for an annual
letter detailing the deductible amount on request.
Why have it?
The most common reasons for purchasing Term Life are
Family, Personal and Business Mortgage Protection
Should a claim occur it is vital that the correct ownership structure is in place. This is simply because if funds are not provided to the correct person or entity, insurance funds may not be used for the purposes they were intended for.
The following provides a broad guide.
Where coverage is purchased to protect remaining family, pay off debt and provide for final expenses, in the majority of cases it is recommended joint spouse ownership.
This simply ensures that the remaining spouse directly receives the insurance funds. This avoids any potential will or estate proceeding delays.
It is found that the insured person owns many existing insurance policies. This means should a claim occur all funds must be paid directly to that person's estate.
For those clients considering or currently utilizing a Family Trust, it is recommended in association with their legal advisers they consider having their life insurance owned by the Trustees of their Family Trust. This together with a Memorandum of Wishes may provide a greater level of protection.
Many single clients purchase cover for the purposes of personal debt and mortgage repayment. In this situation it is recommended that their wills and/or legal advisers are informed of the life insurance coverage being put in place.
This means should a claim occur, the client has provided their clear instructions for how the funds are to be used.
A lump sum payment is also made should the client be diagnosed as terminally ill and likely to die within 12 months. All leading insurers at no additional premium cost now provide this feature.
Coverage can be applied for up to age 70 and can be renewed up to and beyond
age 100 (depending on the insurer selected).
This type of risk insurance is also often called:
· Vital Crisis
*Total & Permanent Disablement Insurance is only ever referred to by its name, irrespective of the company.
The most common reasons for purchasing Serious Illness/Injury Insurance are Family Debts/Mortgages
This coverage is able to contain two main options. The combination of these
two options provides comprehensive coverage should a client's health change
Wherever possible, it is recommended this coverage be purchased to compliment a client's Income Protection and Life Insurance.
The broad definitions of these are:
All leading insurers provide slightly different wordings and numbers of coverable conditions.
Total and Permanent Disablement
Leading insurers wordings of this coverage differ very widely. The following summarises the two main types of definition.
1. As a result of injury or illness, your client is wholly prevented from working for 6 consecutive months, and is unlikely to ever resume work again (own and any occupation definitions apply)
2. The total and irrecoverable loss of:
3. Permanently unable to perform (numbers range from 2-4) out of the 5 activities of daily living:
A client is completely unable to engage in the occupation or carry on the business in which they were involved; and is unlikely to ever engage in that occupation (own occupation or carry on that business or engage in any other gainful employment for which they may be reasonably suited by education, training or experience (any occupation).
Own and Any occupation definitions can be selected at the time a policy is put in place.
This very much depends on the names detailed on any Debt or Mortgage agreements.
Particularly where family assets are involved it is highly recommend ownership be in the joint names of the spouses involved. This means in the event of one spouse dying, the remaining spouse receives a cash payment and so bypasses any will or estate proceedings.
This ensures family assets and homes are placed in a freehold position.
All banks now aggressively 'promote' insurance packages and options for your clients.
Two key areas of coverage are marketed
1. Death/Term Cover
The majority of bank products provide an automatically reducing level of cover for a set premium. The theory being that your client's mortgage will steadily reduce over the term selected.
It is highly recommend your client consider Term Life insurance, which allows manual adjustment to the cover level at any stage. Premium levels are also very low, and simply increase with age. Additional cover for Family or Business needs can also be packaged and so purchased a very competitive rates. Further, in the event of your client becomes ill in the future, the option for purchase of less cover (if required) at higher (poor health loaded) rates is reduced as existing cover still in place.
2. Disability Cover
Several Banks offer this option in the form of short-term illness and accident coverage. Benefit payments can be limited to 2 years and products are generally not designed to cover 'Line of Credit' type mortgages.
It is recommend however, that in all cases your clients should take Income Protection, over Disability Mortgage Repayment insurance, unless their budget is limited. Benefit payments can be extended to age 65, and all leading insurer options provided for their consideration. Further, Insurance providers will offset* Disability Mortgage Repayment insurance against Income Protection, nullifying the benefit.
"The likelihood of suffering a serious illness or injury rather than dying is 10 to 1".
With this in mind, it seems almost inevitable that we will all become seriously ill or injured before we actually die.
"In New Zealand every year 11,231 people suffer a heart attack. More than
half of these people will go on to live for at least another five years"
"1 in 3 males and 1 in 4 females will suffer a form of Cancer other than
non-melanocytic skin cancer".
"1 in 8 New Zealanders will suffer a Stroke, most will go on to live for
at least another five years".
"The incident rates of Coronary Heart Disease in males has increased by
22% over the last decade while the death rate has dropped by 31%".
"More than one in five New Zealanders aged over 15 live with the long
term effects of a disability".
Causes of death in New Zealand, 1996
All Causes of Death Males 14,523 Females 13,856
Source: NZ Health Information Service, 1999
The underwriting process is very unique and personal. This is simply because all of our health history's are different, in sometimes subtle, and other times dramatic ways.
Medical underwriting is complex. Ultimately each individual case must be assessed on its own merits. This may involve the insurers underwriting team, the clients' doctors and/or offshore re-insurers. Once a personal application is completed:
· The insurer may request a Doctors report if an illness or injury has been suffered.
· Blood tests and a medical examination may also be required if the client has a medical condition or is applying for a high level of cover. This is provided at no cost and all arrangements and appointments are co-ordinated by the Adviser.
· For larger covers, the insurer may also require additional financial evidence and financial statements.
Terms are offered by the Insurer, which may include standard rates, exclusions or a premium loading. Advisers should always negotiate these with the underwriter to obtain improved terms or seek alternative insurers if this is unsuccessful.
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