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Kiwis and the Mortality Protection Gap

Kiwis and the Mortality Protection GapReinsurers are the wholesalers of the insurance world. They take a major portion of the risk off all insurers country by country and create huge premium pools that help spread the risk. The process also allows them to collect huge amounts of data and the ability to identify trends in claims as well as uptake of various insurance products.

Swiss Re recently released a local report that included an estimate of the mortality protection gap (MPG) for New Zealand households. That is the gap between households' financial resources and the protection they need to maintain their standard of living in the event of the death of a primary earner. The answer, a staggering $670 billion. In essence this is the estimated “under insurance” in New Zealand for life cover.

The report concludes by estimating that this deficit will increase to $750 billion over the next 10 years with rising consumption and household debt levels being major factors.

Of respondents to the survey only 39% of people owned a life insurance policy while 80% believed that almost two-thirds of households in New Zealand have some form of MPG.
As a result of the survey Swiss Re estimates the MPG per household in New Zealand at more than $830,000 and that less than 36% of households in New Zealand have enough assets to weather the financial shock the death of the primary earner would present.

The remaining (over 64%) face a gap of differing degrees of severity with about a fifth of households having just 10% or less of the financial resources required to cover their protection needs - in other words, an MPG of 90%.

The challenge for insurers is that the survey identified buying life insurance is not a preferred option to enhance protection for New Zealanders.

On average only 16% of survey respondents would buy life insurance to cover the gap. Across all age groups the preferred action was to earn more, spend less and invest more.
More importantly the survey found that 80% of those surveyed believe that losing the income of the primary earner would significantly impact upon the family – this applies in death or disablement.

I’ve never liked the term “under insured” and we have now created a new version of it “Mortality Protection Gap”. My Problem with either term is it doesn’t take in to account the individual.

While we can quantify a range of factors that will determine financial exposures (total debt, dependent family members and their age, business partnerships and business valuations) they don’t account for the individual’s personal perception of risk and that this changes over time.

Factors that will alter our risk perception, or recognition of the consequences of loss, are driven by macro issues (health and economic) – think pandemics, climate change and recessions. And personal influences that include - age, partner status, children, family health history and debt ratios.

No two folk will necessarily arrive at the same conclusion given so many variables. Plus add in the cost factor, that for some make insurance unaffordable.

Besides, insurance is not the only solution to managing risk.

An insurance policy is designed to provide financial assistance at the time of an unexpected loss. It can only compensate the financial loss. It does not bring loved ones back or replace the unreplaceable - physical or material. Physical being your personal health (e.g. loss of vision) and material being possessions (e.g. family heirlooms).

While insurance is a means to fund financial loss there are also other ways to do so.

  • Debt management / borrowings
  • Savings
  • Divestment of assets
  • Reduction in lifestyle / expenses

There is no cost to any of the above unless they need to be applied in the event of a loss occurring. There is, however, a cost to insurance (annual premiums) regardless of whether the policy is ever called upon or not. Some say “the biggest waste of money in your lifetime is insurance premiums”. If this holds true it will mean you have never had to call upon your insurance policies and have had an uneventful life when it comes to major financial loss.

The role of a financial advisor is not necessarily to identify risk and sell insurance. Instead, it should be to identify potential risks and determine the contingencies and options available to manage such loss.

The solution could well be a combination of insurance and any, or all, of the above.

Creating a plan and being comfortable with your decision is the most important outcome of meeting an advisor. Insurance is never the only solution.

Make sure your plan fits you better than your insurance.


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