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"You've Got To Have A Lot Of Money To Buy Cheap"

Buying cheapIt was Peter Brodeur of Ivoclar fame who introduced me to the above saying although I’m sure it's not his original.

He used it often to validate the pricing of dental equipment and to make buyers aware of the true cost. Quality, longevity, durability, additional features, warranty and after sales service are all part of the sticker price. So, while alternatives may be cheaper today they may well cost more in the long term if they are replaced earlier or don't function to the required level.

Ultimately, you get what you pay for - although there is such a thing as brand premium - where you are paying for the name!!!

Our ability to compare tangible products makes it easy to identify value for money. However, I am increasingly seeing people making investment and insurance decisions based on cost. Ultimately "you've got to have a lot of money to buy cheap" could well apply.

I'll give you three examples:

KiwiSaver Fees

There has been a lot of media around the current level of fees within KiwiSaver Funds. A new not for profit organization is looking to charge $30 per month member fee and 0.30% annual fund management fee.

Recognising this provider doesn't have an investment track record as it is new we can look at existing providers and see that for a Balanced Fund the average membership fee is around $2.30 per month with the fund management fee being 1.01% p.a.

So there is possibly significant "savings" to be had by changing provider. However, when you look at the investment performance over the past five years for these Balanced Funds they range from 6.4% per annum to 12.2% per annum and average 8.6%.

Be careful you don't save a fortune in fees only to miss out on investment performance.

Bank staff can be guilty of transferring KiwiSaver by selling the one stop shop / convenience package - "See all your accounts on your Banking App". There is no reference to investment performance or fees. That convenience factor can come at a significant price.

Life Cover

Life Cover is usually cheapest based on your age today. What we often see is people not recognizing how long they may require life cover. Needs change throughout your life time and the amount required will vary as well. The obvious requirements are debt, family, dependants and business. Having been with the NZDIS for nearly 20 years I have seen many folk who told me that they would have no need for life cover in their late fifties – all debt would be paid off, children will have left home and they will have accumulated additional assets.

The reality has been quite different as their life cover needs still exist:

  • Their home is worth more but they have moved up the property ladder a number of times and still have a mortgage, or they have taken on major renovations
  • Children arrived later in life than anticipated and have stayed longer and are still tertiary students
  • As business partners they have either Shareholder Agreements in place or guarantees on loans and leases
  • They have investment or lifestyle properties that are mortgaged
  • They haven't accumulated as much as they anticipated so a surviving spouse / partner still needs a boost to their nest egg

Consequently the "cheap" life policies they bought in their twenties and thirties are now increasing in cost by anywhere up to 20% per annum.

For example, a $500,000 life policy for a 30 year old can be bought for less than $30 per month. At age 60 that same policy costs $300 per month. Total premium paid over that time is approximately $38,500. Alternatively, a policy where the premium is higher at the outset but does not increase (before age 80) is less than $95 per month and $33,000 has been paid in total.

So at age 60 would you rather pay $300 per month (and $1,100 per month at age 70!!!) or still be paying $95?

Cheap today is long term expensive.

Income Protection

 It amazes me how often I have a discussion around the cost of insuring an individual's biggest asset. I’m not talking about their house which people quite often mistake it to be.

Many dentists now earn in excess of $180,000 per annum. So future income (without inflation) can comfortably exceed $7,000,000. The ability to generate this future income is often the biggest asset a person has. The cost for this income potential is high - with six figure student debt the norm and at least 5 years of time invested in the process as well.

There are many factors that determine the cost of income protection cover - amount insured, when the claim payment commences (after a stand down period), how long it pays for (anywhere up to age 70 is available).

Varying these factors affects the price and for example having the claim commence 90 days after absence can reduce the premium by up to 50%. The first 90 days may seem inconsequential when considering a claim that could potentially last through to age 70. However, given that over 75% of the claims to NZDIS last less than six weeks and disability statistics show 1 in 4 people will have at least a three month absence form work by the age of 65, this initial period can become costly.

Even on earnings of $180,000 a stand down period of 90 days can equate to $45,000 of unclaimable loss. If you own your practice and also insure the Business Overheads then the cost of "buying cheap" is only magnified.

The old adage that "you get what you pay for" applies equally in the financial sector as it does with any other product or service. To round off I'll finish with another relevant quote - "Caveat Emptor" - buyer beware.

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