Underinsurance: how much cover people actually hold

Underinsurance means the cover in place would not meet the loss it exists to cover. It shows up in two forms: households with no cover at all, and households with cover that was correctly sized years ago and has not been looked at since.

The second form is more common and much less visible. A policy taken out for a $320,000 mortgage in 2014 is still doing its job perfectly — for a mortgage that is now $700,000, a household that now has two children, and an income that has doubled. Nothing about the policy failed. It simply stopped matching.

The New Zealand data does not measure the gap directly, because nobody publishes what New Zealanders would need against what they hold. What it does show is a market where most people have no life cover, where penetration sits below comparable countries, and where premium income is rising while the number of policies falls.

Why the gap persists

• ACC creates a reasonable but incomplete sense of safety. It covers accidents thoroughly and illness not at all, and most long-term income loss comes from illness.
• Life insurance is sold, not bought. People act after a life event or an adviser conversation, and in between nothing prompts a review.
• Cover is easy to set and easy to forget. Sums insured do not automatically follow a mortgage upwards.
• Premiums rise with age, so the cover most likely to be cancelled is the cover held by the people most likely to claim.
• The covers that pay while you are alive — income protection and trauma — are the least understood and the first to be cut when budgets tighten.

Working out whether you are part of it

1. 1Find your current sum insured and the date you last changed it.
2. 2Find your current mortgage balance and compare the two.
3. 3Add up how many months your household could run on savings if your income stopped tomorrow.
4. 4Check whether anything you hold is employer-provided, and therefore ends with the job.
5. 5Check whether your cover indexes with inflation, or has been quietly flat for a decade.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Cover that was right at the time and has never been reviewed. This is the most common form of underinsurance.
• Indexation switched off years ago to save money, leaving the sum insured flat while everything else inflated.
• Employer group cover counted as permanent when it disappears with the job.
• Life cover in place with no income protection, which insures the less likely event and ignores the more likely one.
• A mortgage top-up or renovation loan that never triggered an insurance review.
• Cover on one partner only, in a household that needs both incomes to function.

Every New Zealand insurer writes how much life insurance do you need to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• An adviser reviews existing cover before recommending anything new, which is how gaps get found in the first place.
• Increasing cover on an existing policy is sometimes possible without full underwriting where a special events benefit applies — knowing that can save a fresh medical assessment.
• Where health has changed since the original policy, keeping the old cover and adding a new layer often beats replacing it.
• An adviser can tell you when the gap is not worth closing, which is a real answer for some households.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.