When it comes to insurance, it's tempting to think of premiums as a cost we can avoid or reduce. After all, if life is going smoothly, it can feel like money that could be better used elsewhere. However, being underinsured – having less coverage than you really need – can lead to significant financial, emotional, and lifestyle impacts when life throws you a curveball.
This isn't just about financial costs; it's about protecting your family, your health, and your future.
What Does It Mean to Be Underinsured?
Being underinsured means you have some coverage, but it's not enough to fully protect you or your loved ones if you experience a major life event. Many Kiwis might have basic life or health insurance, but it often falls short when an unexpected illness, injury, or trauma occurs, leaving significant financial gaps.
In New Zealand, relying solely on public healthcare or ACC (Accident Compensation Corporation) isn’t always enough. ACC, for example, only covers injuries, not illnesses, and while public healthcare is comprehensive, waiting times for treatments can be long, and not all services are fully covered. Having the right private insurance is crucial to making sure you’re protected – but underinsurance is a common issue.
Let’s take a closer look at where underinsurance can have serious consequences.
Life Insurance: Protecting Your Family's Future
Life insurance is designed to provide financial security to your family if you pass away. Yet, many Kiwis don't have enough life insurance to truly safeguard their loved ones. A 2021 Financial Services Council report found that nearly 1.8 million New Zealanders don’t have life insurance, and those who do often underestimate how much cover they really need.
If you were to pass away unexpectedly, would your current life insurance payout be enough to cover funeral costs, mortgage payments, and provide for your family’s future? Without adequate life insurance, families might have to rely on savings, sell assets, or face significant financial hardship. It’s essential to review your policy regularly, especially when life circumstances change, like getting married, buying a home, or having children.
Trauma and Critical Illness Cover: When Recovery Takes Time
Trauma insurance, also known as critical illness cover, pays a lump sum if you're diagnosed with a serious illness like cancer, heart disease, or stroke. This payment can help cover medical costs, lost income, and the lifestyle adjustments that often come with a major health crisis. However, many Kiwis are underinsured in this area and may not realise the financial strain they’ll face if they become seriously ill.
Even with New Zealand’s public health system, the costs of private treatments, rehabilitation, or lifestyle changes can add up quickly. Additionally, time away from work to focus on recovery can stretch your finances thin. Having enough trauma cover means you can focus on your health without the added stress of financial worries.
Income Protection: Safeguarding Your Livelihood
Income protection insurance is one of the most important yet under appreciated forms of insurance. It provides a regular income if you’re unable to work due to illness or injury. Many people assume that sick leave, ACC, or savings will be enough to tide them over, but the reality is that these safety nets often fall short, especially if you're off work for an extended period.
Income protection policies typically cover a percentage of your income – often up to 75%. This can be a lifeline in maintaining your lifestyle and meeting financial commitments like rent, mortgage payments, or school fees. Without sufficient cover, being unable to work for months or years could put your entire financial situation in jeopardy.
Disability Insurance: Supporting Long-Term Needs
Permanent disability can completely change your life and your financial needs. Disability insurance, which can be part of life insurance or a standalone policy, provides financial support if you’re no longer able to work due to a disability.
Being underinsured in this area means you could be left without enough money to modify your home, pay for ongoing medical treatments, or cover daily expenses. In many cases, government assistance and ACC payouts won’t fully meet these needs. A comprehensive disability policy ensures you can maintain your quality of life even after a serious life-changing event.
Health Insurance: Reducing Wait Times and Out-of-Pocket Costs
While New Zealand’s public health system offers excellent care, it doesn’t cover everything. For instance, long wait times for specialist appointments or elective surgeries can be frustrating, especially if your health is deteriorating while you wait. Private health insurance provides quicker access to medical treatments and specialists, and it can also cover a wider range of treatments, including surgeries, diagnostic tests, and more.
Many Kiwis underestimate the coverage they need for private health insurance, which can lead to unexpected out-of-pocket costs for treatments that aren't fully funded by the public system. Regularly reviewing your health insurance ensures that you’re not caught short when it matters most.
The Emotional Cost of Being Underinsured
Beyond the financial burden, being underinsured carries a heavy emotional toll. The stress of navigating serious illness, injury, or disability is already overwhelming, and the added pressure of financial strain can make it even harder to cope. Whether it’s worrying about how to pay bills while off work or scrambling to cover medical costs, the emotional cost of being underinsured can take a serious toll on your mental and physical well-being.
By ensuring you have sufficient cover, you can avoid this unnecessary stress and focus on what really matters – your health, your family, and your recovery.
Avoiding the Pitfalls of Underinsurance
So, how can you make sure you’re not underinsured? It’s all about regularly reviewing your policies and making adjustments as your life changes. Here are a few steps you can take:
Assess your current needs: Look at your financial obligations and lifestyle. How would these be affected if you were unable to work or faced a serious illness?
Consult a professional: A financial adviser or insurance specialist can help you identify any gaps in your current coverage and recommend the best policies for your situation.
Review your policies regularly: Make it a habit to reassess your insurance policies every year, especially after major life events such as buying a home, getting married, or having children.
Explore your options: Different insurance providers offer varying levels of cover. Make sure you're getting the right policy for your needs. You can start by exploring your options here.
Don’t wait until it's too late to find out if you're underinsured. Being proactive now can save you from significant financial hardship and stress later. Start reviewing your insurance needs today.
Resources
Find more information about life insurance options and how much cover you might need at Sorted.org.nz.
Learn about the importance of income protection insurance from the Financial Services Council of New Zealand.
For insights into trauma and health insurance options, visit Health Navigator NZ.
Disclaimer
The information in this article is general information only and is not intended as financial, medical, health, nutritional, tax, or other advice. It does not take into account any individual’s personal situation or needs. You should consider obtaining professional advice from a financial adviser and/or tax specialist, or medical or health practitioner, in relation to your own circumstances and before acting on this information.
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