1 LIFE LIMITED Discover why most life insurance policies will never pay out! Find out what most Kiwis are never told about their life insurance - and how simple it is to fix!
2 2 Contents Perception versus Reality... 3 What space is to size, distance is to value... 4 Deception or Illusion... 5 The Facts are:... 6 The right question... 6 A quick history lesson... 7 The current position for Kiwis... 8 Stepped Premiums Level Premiums Mythbusters How does this affect me? A difficult pill to swallow Why have I not heard of this before? Clients Brokers Insurance companies & Banks Your notes So what makes us the experts Find out how it is not always comparing apples with apples and that not all apples are created equal. Firstly we need to understand why our perception of things is often not the reality... Copyright Compass Life Limited 2009 No part of this publication, may be reproduced in part or whole without written permission of the copyright owner. The illustrations and examples used in this publication in relation to level premiums are the intellectual property of the copyright owner and may not be used without the written permission of the owner.
3 3 Perception versus Reality Which is bigger, the sun or the moon? Although as children our perception of the sun and the moon was that they were of a similar size, our education has taught us about perspective and distance and we now know differently. The amazing coincidence is that the sun is actually 400 times larger than the moon, however it is also 400 times further away from us creating the illusion that they are the same size. Which shape is bigger A or B? A This is one of those illusions that no matter how many times we look at it and know the answer, it is hard to see these shapes as being exactly the same size. Yes exactly the same. The reason for this is our point of reference or comparison is focussed where the shapes are closest. We are comparing the bottom of A with the top of B. Our mind is deceived by the relationship of the shapes to each other and their position. I know you want to put them on top of each to prove this to yourself, trace one shape out and then compare them. B The point is, if you don t know how to make the correct comparison you can easily be mislead. Most people, their broker or even bank will make this same mistake with life insurance. Hard to believe? - Read on. Why does the moon appear bigger when it is lower on the horizon? In the vast expanse of the sky when the moon is high it appears small; when it is low on the horizon close to houses and trees it appears large because we have a reference to compare it to. That s right these two moons are the same size!
4 4 Does my bum look big in this? Now I think we all know the answer to this one. If we need to ask the question, it s likely not our pants that we need to change, it s our diet. The truth is that some clothes can help us appear slimmer, for example vertical stripes or wearing black. But did you know the right outfit with horizontal stripes will actually appear 6% slimmer than vertical stripes? New studies show...(well in 1866) People generally accept the fact that vertical stripes can make something look thinner, most don t know that it was documented back in 1866 that horizontal stripes can be even better. Go on Google it! And the trick to wearing black or any colour for that matter is not segmenting our body with differing colours top and bottom. Helmholtz squares 1866 What space is to size, time is to value - Plato In the same way that optical illusions fool our eyes -- and fool everyone s eyes in the same way -- Gilbert argues that our brains systematically misjudge what will make us happy (or wealthy). And these quirks in our cognition make humans very poor predictors of our own bliss. - Ted.com Studies by social psychologist and Harvard professor Dan Gilbert demonstrate how humans are not good at judging value over time: Hopefully the obvious: Would you like $50 now or $60 now? That is easy... more is always better. Would you like $50 now or $50 in one month? Easy too...now is better than later. Now it gets harder: Would you like $50 now or $60 in a months time? Hmm...most people take the $50 now. It takes 100 s sometimes 1000 s of percent interest (annualised) for people to delay gratification. Would you rather have $50 in 12 months or $60 in 13 months? Now...most people reason I ve already waited 12 months what s 1 more month and take the $60 in 13 months. See how time has distorted the value, by month 12 you still have to wait the same one month. This demonstrates how time distorts and confuses our sense of value over time, the same as space distorts size like the moon on the horizon. When we can see it and compare it to houses and trees it looks huge and yet in the vastness of the sky when it is high it looks smaller. Would you rather spend $15/month or $30/month? That is easy if it is the same thing we get over the same period of time, but what if you knew the $15/month will increase each year and far surpass the $30/month as it remains the same. The answer isn t as simple unless we have all the information.
5 5 Deception or illusion? Some insurance companies and banks deliberately try to create an illusion of low premiums and hide the fact that they increase to the point of being unaffordable later. We believe this to be deceptive. For example, Westpac Life insurance have a whole page showing the future cost of your premiums. It is quoted per $10,000 worth of cover less any discount you may have. We feel this is a deliberate attempt to hide the true cost to the customer. There are also a few main-stream insurance companies who discount the premiums for the first few years to create the illusion that their products are cheaper only to sneak them up later. There are many brokers and advisors who are happy to sell these to the uninformed public. It is the lazy way of making a quick buck, selling primarily on price. We believe everyone has the right to being fully informed, educated and then given the opportunity to make an informed choice. When has cheapest ever been best? Everyone knows taking a cheaper product will cost us more over the long term. Sure, if you only need something for a specific purpose and don t require it long term the cheaper option can be better value. When you buy a $20 electric drill from the Warehouse it works perfectly for the few holes a year you might want to drill or for a weekend project. But for an electrician drilling holes everyday, he will purchase something designed and engineered to last the distance. The $20 drill isn t going to last the distance or represent good value long term. When we ask people how long they want their life insurance for, they often laugh and think that we are asking when they are planning on dying! After all, isn t life insurance something you should be able to keep as long as you want or need? Unfortunately, what most people are asking is for the $20 electric drill to last a lifetime. Even the check-out operator will tell us it won t last that long! So let s see how we got to this sorry state... There is nothing in the world that some man cannot make a little worse and sell a little cheaper John Ruskin
6 6 The facts are: Most won t be able to afford life insurance as we get older, when we are more likely to need it. You will cancel your life insurance policy before you want because for most people it becomes unaffordable. Today s lifestyle means that as we reach older ages most still have the need for life insurance. There are no savings or long term loyalty benefit with term life insurance cover today. It is cheap to start with when you are young but from 40 years of age the premiums take a hike upwards. The right question Life insurance forms a critical part of our personal, business and family protection plans and many New Zealanders have some form of life insurance in place for this reason. The first question that anyone buying life insurance should be asked is how long they would like to keep the cover for. Instead they are often asked how much cover they would like or perceive they need. This places much of the focus on the here and now with some potentially disastrous outcomes further down the track. Our motto at Compass pointing you in the right direction presumes that you, the client, are clever enough to make your own decision as to where you want to go. You just need to be provided with the right information on how to get there. But what happens if you don t get all the facts? What happens when you expect one outcome but find yourself faced with something entirely different? Read on and find out all you need to know about this most disturbing issue
7 A quick history lesson 7 Thirty years ago the life insurance industry in New Zealand looked very different. When you purchased a life insurance policy it meant you could keep it for life or the term of the contract. They were either Whole of Life or Endowment policies. These polices are not readily available today and didn t always provide the best return on your investment. For example when the market is down your savings could go backwards. Today there are better ways of saving your money and getting a return, including KiwiSaver, repaying debt etc. Insurance is not the best vehicle in which to save money, which is why most companies stopped offering these policies. It wasn t until 1981 that the first renewable term life contracts were introduced into New Zealand and this is the common life policy sold today. Renewable term or stepped premium policies had as an advantage that people were now able to purchase more cover as the initial premiums were often much lower. As the person gets older these premiums typically increase each year. There is a general trend showing that people getting into their 50 s and 60 s are no longer able to afford these stepped life insurance premiums. Often they need to reduce or even cancel their cover at a time when they are at a much greater risk of becoming terminally ill or dying. Today s lifestyle means that for many reaching these age groups it does not necessarily mean a reduced need for life insurance, let alone no need for any life insurance at all! A 35 years old female with $250,000 life insurance will pay about $15 per month for this. When she is 65 the premiums will $222 per month and $1500 per month at age 80. True value depends entirely on what you compare it with. Bob Wells
8 8 The current position for Kiwis The main life insurance sold today in New Zealand is Term or Temporary Life. When you stop paying the premiums it has no future value or benefit, hence is temporary. Most people will cancel these policies before they claim on them as they are unaffordable for most people as they get older. However, as the generation that owned Whole of Life policies pass away, the next generation is facing retirement with few insurance options available. Everyone has been told for years that you don t need life insurance when the kids have left home or the mortgage has been paid off etc. This may be true if one has reasonable retirement savings, but for most it is proving to be a difficult time. Consider these scenarios: John and Jane are in their mid 50 s, the kids have left home, the mortgage is small and reducing. Because the premiums are becoming so expensive now they rationalise that not many people can afford insurance at their age and because of their circumstances they probably don t need it either. They cancel their life insurance. Then 2 years later John developed colon cancer. After 12 months of surgery and treatment he is told that he has less than 12 months to live. This news is devastating and occurs over 8,000 times each year in NZ. Almost 2 years after John was first diagnosed with cancer, a period in which he was unable to work, he passes away. Jane had to dramatically reduce her own working hours to assist John through his treatments and surgery. Between them they had earned almost $100k per year, whereas this had been reduced to $42K during the last 2 years, even with the sickness benefit. Immediate family were able to help with $20k and the bank would only lend another $50k on the house as it was down to Jane to service it, so they decided to put the house on the market. 3 weeks before John passed away they moved from their family home for the last 17 years to a rental townhouse. We all know that no amount of money, insurance or otherwise could make this tragic situation go away. But it does give us choice and options. John and Jane s life insurance policies would have paid out when John had been told he had less than 12 months to live. If only there had been some way they could have kept some of their cover in place. Even just $100k would have been invaluable. They could have kept some, if they only knew how! On a personal note: TEMPORARY My mum was 69 and dad was 71. Dad had been hospitalised for the last few months and passed away very quickly one night within 12 hours of getting pneumonia. Obviously a difficult time for our family. The funeral director met with
9 9 us the following morning and told us we didn t need to worry about the funeral expenses as they would be able to invoice Tower directly. That s right, dad had a Whole of Life insurance policy. Within a short space of time mum got the benefit from dad s policy, meaning the savings she now has can supplement the superannuation she receives and she can maintain the lifestyle she had. Dad had always taught us kids the importance of insurance and since a bout of cancer in his 40 s he had jealously protected the cover he had in place. Did you realise that if one partner dies and you are on the pension and you go from a married to single rate, the difference is currently $9,410.44/annum (gross) that you will lose? Just to maintain your current lifestyle, you would possibly want at least $100k insurance to cover at least years differential. Obviously whole of life insurance is hugely expensive today and doesn t represent good value, however there are many affordable long-term options still available. Relative size of premiums compared to benefit: Stepped Premiums From age $250,000 Life Insurance Benefit Level Premiums From age No, this is not another optical illusion. Level premiums are really this small by comparison. Idealism increases in direct proportion to one's distance from the problem. John Galsworthy
10 10 Stepped Premiums Most people know how stepped premiums work because we complain about our insurance premiums increasing each year as we get older. The industry has taken advantage of a Kiwi trait! Typically, Kiwis have not been the best savers and the financial institutions have pandered to that trait which has penalised even the most discerning customer. When you are young the risk of dying is low and premiums are cheap as chips, so you are able to have $100,000 s of cover for less than $30/month. However, when you creep up over 40 years old and realise you are not 8 foot tall and bullet proof and need this insurance stuff more than you originally appreciated, it insidiously increases at an exponential rate. We struggle to think of any other product where the consumer is treated as such a mindless ignorant peasant and is expected to simply pay the increasing premiums. It would appear as though we are not meant to have a decent amount of life insurance as we get older. People often start to cut back and when they eventually cancel are left with no meaningful amount of cover at all. Unfortunately, most people are not fully advised of their options by banks, brokers and insurance companies. You do not need to put up with age related increases or cancel and be left with no cover at all! Level Premiums Level premiums mean that you can elect to pay more premium today when premiums are affordable and not face increases in the future. There are many different options when looking at level premiums ranging from 5 or 10 year level, level to age 65 and right up to age 80, 90 and 100. There are even options available whereby you can insure with no age expiry or get all your premiums back. The chances of claiming on your life insurance today are not as high as they will be in 10 years time. Unless you take the right steps today, it is unlikely that you will be able to afford cover when you are more likely to need it. It is important that the protection you take today continues to work for you in the future. You have the option of being offered CPI (Consumer Price Index) increases. This ensures that the cover you take today has the same equivalent value many years from now.
11 11 Overall life expectancy has increased in recent years particularly with the aid of medical advances. This means that the need to keep life insurance in place for a longer period has similarly increased. People are also working longer and are carrying more debt than ever before, further driving the need for affordable longer term insurance cover. Have you ever looked at property prices and exchange rates before a major shift in the market and wished you could go back in time to take advantage of that change? Well the good news is we can accurately forecast your insurance premium rates and guarantee the minimum amount they will increase by because of your age. We can also show you premiums that are guaranteed not to increase with age and provide the accurate comparison to see its value. You don t have to be in a position years down the track wishing you had made the right decision. We can accurately show you how to avoid the pitfalls today. Don t feel bad if you are not on the right track at the moment as over 97% of policyholders are unaware of the better premium options and have only been shown the tip of the iceberg. The best of both worlds That s right, you can structure a plan where you can have a policy which combines the cheaper cover of stepped premiums and the long-term affordability of level premiums combined in the policy. You don't have to make big changes to accommodate benefit from level premiums.
12 12 I shop around for life insurance rates so I must be getting the best deal, right? Whereas shopping around for most consumer items makes sense, it presumes the items you are comparing are of equal value. It would be unreasonable to compare different size televisions solely on price, for example. Life insurance is no different in that there are very clear differences between policies. The cheapest policy today may turn out to be the most expensive over the longer term. Insurance companies are not above discounting the rate for the first year or two to win your business, only to increase it later. DO NOT be fooled by cheap-looking quotes! I have been with my insurer for a long time. If I switch won t I lose all that I have paid up so far? A common misunderstanding about life insurance is that you are building up value. The fact is that most people have term life policies which are no different to house, contents or car insurance; you simply pay for a month and receive cover for that month. You will lose nothing by switching your cover to a better longer term solution with regard to the premiums you have paid. Rather, if you stick with a cover that will become unaffordable then you stand to lose a lot more than just your premiums! I will keep my life insurance until I die! Sadly, this is one of the most common myths we come across day in day out. Modern term life insurance policies will become way too expensive even before you retire, so there can be little hope of retaining this cover anywhere near your dying day. The fact is that the majority of people will have cancelled their life insurance policy due to concerns about cost well before they die and so they will lose not only their premiums, but have no cover when it is actually needed.
13 13 Life insurance is only relevant if I have debts or dependants. Although having a mortgage or children (or even a business partner) can be great motivating factors in people purchasing life insurance it would be far from the truth to suggest that these are the only people who are in need of cover. All decent life insurance policies will pay out on what is known as a terminal illness. This can typically include such conditions as cancer and means the policy will pay out in full if the person is deemed to have 12 months or less to live. There is plenty of medical information and statistics out there to suggest that this could include any of us at any time and makes for a sobering reminder as to the immense value a life insurance policy can bring, provided that you can afford to keep it going long enough to claim! (see scenario on page 8) I have existing health conditions therefore I can t switch cover! There are many people who have had a change of health since taking out their life insurance policy, and they can feel like they no longer have the freedom of choice. Often people are able to consider level premium options within the very company that they are currently with, although it is unlikely that this has been explained to them before. For those who don t currently have cover and may have been turned down in the past we have another exciting option available. This is a policy that guarantees up to $50,000 of level premium life insurance without the need for medical information, at very affordable rates. With all the options available today we can get cover for those who may have formerly been considered uninsurable and at affordable rates that won t increase with age. Discuss this with us.
14 14 How does this affect me? If you are one of the many New Zealanders who currently hold a stepped life insurance policy then your premiums will become much more expensive as time goes by. When you really need it there is a good chance you will no longer have it in place. Cancelling your cover will not only mean a loss of every premium that you have paid but, crucially, that you will not have any cover moving forward. If you have life insurance and you know that you want to keep it long term then there is only one choice open to you which is to incorporate some level premium into your policy as soon as possible. The younger you are the better the level rate that will be available to you. The great news is that it is never too late and the older you are the less time it takes for a level premium policy to save you money. The most important message here is that everyone who has a stepped life insurance policy is affected. This is why most life insurance policies will never pay. They won t pay because they will have been cancelled before there is a chance of a claim. If a female aged 35 has $100,000 life insurance to age 80, the accumulated premiums would be $73,500. If she had taken level premiums at $16 per month, she would only pay $9000. A saving of over $64,000! Perception is strong and sight weak. In strategy it is important to see distant things as if they were close and to take a distanced view of close things. Miyamoto
15 Level Premiums 15 Stepped Premiums Level Premiums Notice how when we view Stepped premiums compared to level premiums looking from the higher age perspective it is easier to appreciate the true value of level premiums. You don t really notice that at age 35 you needed to pay more. A difficult pill to swallow? When people compare stepped and level premiums we only see where we are today here. 35 years old If you were 35 and had your insurance just to age 65 this is the profile o f y o u r p r e m ium increases. Stepped Premiums 65 years old If these premiums were pills, which one would you rather swallow?
16 16 Why have I not heard about this before? By now you will have gained a little understanding as to what level premiums are and how they work. What you may be wondering is why this all seems like news to you. Firstly, you are far from unique. Over 97% of all Kiwis have not come across the concept of level premiums before. That is incredible! We think the reasons for this can be broadly divided into three main areas: Clients It is natural and prudent that we should check out the market to see if we are getting a good price on an item. If you are buying a particular model ipod for example, there will be always be a slight variance on price amongst retailers and you are in a good position to judge which is the best value for you (returns policy, extended warranty etc.) However, as discussed in Myth one (page 12), when we start talking about life insurance this is not comparing apples with apples. Most believe they have chosen good value premiums while in fact are getting cover many times more expensive than better options available. Do not be mislead. If you contact most brokers, banks or shop online and ask for their best price then by default you are going to be provided with stepped quotes that will always be cheaper initially. So our natural desire to pay less, and a market unable to compete on quality rather than price, means most will pay more and be unable to afford insurance when they are more likely to need it. Brokers Traditionally most insurance brokers were more akin to salesmen (and women, of course!) and as such had an incentive to try and sell you whatever they could. One of the common denominators of sales of any kind is price and so the psychology of sales would suggest that selling you a lower priced item is easier than a higher priced item. As far as life insurance is concerned that means selling you a stepped policy
17 17 over a better-value level type policy. In more recent times it has become more fashionable for insurance advisers to make recommendations based on your need for cover. As a result of this, the average sums insured have increased dramatically and it follows that for most people having level premiums would simply be too expensive. We feel that it is very dangerous to presume that all clients would be happy to cover every conceivable need for life insurance today and yet not point out the true longer term cost of this protection. For most clients, a compromise of some stepped and some level cover is the much more appropriate course of action. There is little point in driving a Rolls Royce today if you won t be able to afford even an old Lada in a few years time! Insurance companies & banks Well one problem here is demand. If Clients don t know what to ask for and brokers and banks don t know how to educate clients on purchasing value long-term then the demand isn't high. With less than 2.5% of the market currently enjoying level premiums very little effort has gone into addressing the problem. However, things are changing and we have been in discussions with a number of companies on improving their communications and sales tools for advisors and the general public. We have even sold our proprietary tools and software to them to help with this. Another key issue is that some insurance providers, including banks, don t have level premium options for their clients. Furthermore, the benefits of something a company does not have is unlikely to be communicated to its clients. Similar to a restaurant not telling you about the two-for-one special from a competitor just down the road. If your life insurance company, bank or broker has not shown you the advantages of level premiums let us show you the many options you have.
18 18 Checklist: HOW LONG DO I WANT TO KEEP MY INSURANCE FOR? HOW MUCH AM I CURRENTLY PAYING? DO I KNOW WHAT TYPE OF POLICY I HAVE? DO I KNOW HOW MUCH MY PREMIUMS WILL INCREASE? AM I ONE OF THE 97.5% THAT DON T HAVE LONG-TERM COVER? NOT SURE? - CALL 0800 COMPASS TODAY! Printed: 8/09/2010
19 19 So what makes us the experts? The industry did! For years now we have advocated the long term benefits of premiums that don t increase with age. Most advisors haven t had the tools or inclination to raise this contentious matter with clients who have been sold the cheapest option for so long. How do they now tell you that you should have done this sooner? Compass has developed tools and software to help you appreciate the risk of not being fully informed and the value of protection when you most need it. We are so passionate about everyone being fully informed about this that we have presented this to insurance advisors at seminars around the country, sponsored by New Zealand s leading insurance companies. Our intellectual property and software has been purchased by the industry for distribution nationally and we are consulted regularly when companies wish to raise industry awareness for affordable long term cover. We don t tell you what you should have and then provide pages of meaningless reports comparing companies and premiums. We prefer to spend this time educating you to make decisions for yourself and what represents the best value and fits your budget, not just today but for the future. Not many people are buying insurance just for the next year, so why should you only be given this years premiums to compare? This has never made sense. with your bank, broker or insurance company. If you believe you have been given the wrong advise in the past and don t have the confidence in their advice moving forward, you now have the tools to ask the right questions when considering your long-term options. Remember, don t cancel your existing cover until you have sought advice. In many instances you don t need to change the company you are with, you just needed to have been given the right advice in the first instance. Most companies will have the right option for you. If you do require further assistance or help in getting the right advice feel free to drop us a line or to us. At Compass our philosophy is to point you in the right direction and if you want our help along the way, even better! We hope you have found our booklet to be informative and enjoyable reading. Feel free to request a copy for a friend. LIFE LIMITED Being informed now, we hope you have the information to discuss this important issue Pointing you in the right direction