Insurance & Self Insurance in NZ

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joff_nz

446 posts

Ultimate Geek

#216639 6-Jul-2017 09:50

Lots of smart people here, and I cant really find any local discussions on self-insuring. We're going through the process of selling our home and buying one of a lesser value. This fortunately puts us in a position of high equity.

Through this process I've been looking at our wider budget, and considering the value and costs of all of our insurances.

For example, we're paying for

Contents insurance about $60k covered.

Life & trauma insurance for my wife & I, about $50k each both benefits.

Car insurance for our car worth about $12k

and we're paying something like $100/month for these covers - and those premiums will most certainly increase in the future, a lot.

We also pay home insurance which is non-negotiable.

What I'm thinking about is, would I be better off to take a $50k offset loan as part of our new purchase, put that on interest only, and only ever use that money in the event of something that would be claimable. (and obviously put the $100/month back into the mortgage)

Pros:

-I never have to worry about a claim being declined

-If I never 'claim', I get to keep all the money I would have paid in premiums.

-No excesses or loss of no claims discount - I could use that money for small events that I wouldn't bother claiming on a normal policy

Cons:

-Those insurances could pay out repeatedly, I can only use saved money once.

-The additional lending could work against me in the future

I would keep third party insurance for the vehicle, as the exposure to risk is much higher than $50k.

Not looking for advice as such, just curious to know if anyone else here is doing anything similar, or thought about it.

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2780 posts

Uber Geek

#1813600 6-Jul-2017 10:02

Personally, for your situation I wouldn't self-insure things of that magnitude. For a start, you're going to be way underinsured if you're putting aside $50k. You say you have $60k in contents insurance alone.

If you're taking out the $50k as an interest-only loan, interest-only on $50k at 5.8% is still about $240/month, which is more than you say you're paying in insurance premiums. As interest rates rise, so will that payment.

Even for the car, which could be worth considering self-insuring, usually the difference between third-party fire/theft and full insurance is not huge unless it's a particularly valuable or high risk vehicle, and given you've valued it at about $12k there's probably negligible difference.

Edit to add: We looked at doing similar recently, and very quickly found that, at least for our situation, it is both cheaper and lower risk to simply shop around for insurance options.

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networkn

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#1813602 6-Jul-2017 10:06

I agree you are underinsured. Bear in mind a lot of policies include clauses that say if the adjuster detects you are under-insured, they may decline your claim, or pay only the percentage you were correctly insured for. You will be very surprised what it costs to rekit a household in the event of total loss. Clothing is an item that catches most people out.

I would consider 50K for life insurances exceptionally low, but I am guessing maybe you have no kids. I wouldn't consider life insurance under 250K, but more likely 500K.

For your car, it's fine if you self insure that, so long as you bear in mind, that if you hit a 300K car, and it's YOUR fault, they will come after you personally, you could lose everything. Not worth it in my opinion.

Given your situation, and the amount of premiums you pay, I would think you'd be better to work an extra 1-2 hours a week rather than worrying about something like you are.

joff_nz

446 posts

Ultimate Geek

#1813603 6-Jul-2017 10:13

Inphinity:

Personally, for your situation I wouldn't self-insure things of that magnitude. For a start, you're going to be way underinsured if you're putting aside $50k. You say you have $60k in contents insurance alone.

If you're taking out the $50k as an interest-only loan, interest-only on $50k at 5.8% is still about $240/month, which is more than you say you're paying in insurance premiums. As interest rates rise, so will that payment.

Even for the car, which could be worth considering self-insuring, usually the difference between third-party fire/theft and full insurance is not huge unless it's a particularly valuable or high risk vehicle, and given you've valued it at about $12k there's probably negligible difference.

Edit to add: We looked at doing similar recently, and very quickly found that, at least for our situation, it is both cheaper and lower risk to simply shop around for insurance options.

Ah yes, for sure - the part that makes it work is specifically that it's an offset mortgage. So I borrow the $50k, sit that $50k in a paired account, and with it on interest only there are no interest charged nor repayments. (unless I 'claim')

The thing is also, really the amounts we have now are more than required.

$60k of contents would be a total & absolute loss of every item in our house. While possible, I consider that unlikely - and even if the house did burn down and take everything with it - we could certainly live a comfortable life without replacing every single item at retail value. I think a more appropriate level of cover would be something like $25k.

Likewise each of our life insurance polices is intended to replace my income for long enough to sell & downsize our house, which would leave enough to buy something smaller & be mortgage free or close to it.

I would certainly consider the numbers very carefully before making this sort of change.

SumnerBoy

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#1813605 6-Jul-2017 10:16

Interesting topic, it is something I wrestled with recently as well. Mainly around health insurances though. Health cover is very expensive and as we all know the insurance companies will do anything to get out of paying a claim. But looking at the numbers, most procedures run into the 10's of $000, e.g. a friend had a back issue and had a 30K procedure to fix it. It was an elective procedure and luckily they had health insurance, and now her quality of life is many times better. It only takes one or two of these types of events and any self-insurance savings are wiped out and you are left with nothing in reserve, and an inability to get an insurance cover going forward, for those pre-existing conditions.

I seriously considered just relying on the public health system, which is very good here in NZ. But there is the problem with wait times for non-urgent procedures and you still have to pay for elective and preventative things.

An osteopath I was seeing once told me he doesn't ever have health insurance, his view was you are effectively *betting* on getting seriously ill. That resonated a bit with me to be honest. You are saying that you expect to have something bad happen so that you get more out that you put in (via premiums). It is a sub-conscious state of mind that is almost willing your body to get sick, to get your monies worth. Thought it was an interesting view point.

In the end, with a young family and enough income to cover health insurance, we have decided to get it. It is good piece of mind and nice to know you are covered in the event of something nasty.

joff_nz

446 posts

Ultimate Geek

#1813613 6-Jul-2017 10:18

networkn:

I agree you are underinsured. Bear in mind a lot of policies include clauses that say if the adjuster detects you are under-insured, they may decline your claim, or pay only the percentage you were correctly insured for.

I would consider 50K for life insurances exceptionally low, but I am guessing maybe you have no kids. I wouldn't consider life insurance under 250K, but more likely 500K.

For your car, it's fine if you self insure that, so long as you bear in mind, that if you hit a 300K car, and it's YOUR fault, they will come after you personally, you could lose everything. Not worth it in my opinion.

Given your situation, and the amount of premiums you pay, I would think you'd be better to work an extra 1-2 hours a week rather than worrying about something like you are.

Thanks - We actually do have 3 kids, but we also have a large home with a lot of equity and very good family support. If I passed away for example, my wife would sell and either buy a smaller home with no mortgage, or move into her parents family home. The life insurance amount was carefully considered and would allow her a year of no financial changes to get things setup as needed.

And yeah to reiterate - I'd never be without 3rd party insurance on the car

Fred99

13684 posts

Uber Geek

#1813615 6-Jul-2017 10:20

Inphinity:

Even for the car, which could be worth considering self-insuring, usually the difference between third-party fire/theft and full insurance is not huge unless it's a particularly valuable or high risk vehicle, and given you've valued it at about $12k there's probably negligible difference.

I've got third-party, fire and theft & glass cover only on one of our vehicles probably valued at about $10k. Cost is about $120 / year, vs about $300 for full cover for our other vehicles.

Haven't made an "at fault" claim on any vehicle policy in NZ since about 1978 when I fell off my motorbike - which may explain the low premiums, but there's still a big difference between full cover and third-party.

Actually reminded me though, the old Safari went down in value for years, I changed over to 3rd party when IMO it was worth about $4k. It's actually started going up in value, so I might change back to full cover when the policy comes up for renewal.

joff_nz

446 posts

Ultimate Geek

#1813616 6-Jul-2017 10:21

SumnerBoy:

Interesting topic, it is something I wrestled with recently as well. Mainly around health insurances though. Health cover is very expensive and as we all know the insurance companies will do anything to get out of paying a claim. But looking at the numbers, most procedures run into the 10's of $000, e.g. a friend had a back issue and had a 30K procedure to fix it. It was an elective procedure and luckily they had health insurance, and now her quality of life is many times better. It only takes one or two of these types of events and any self-insurance savings are wiped out and you are left with nothing in reserve, and an inability to get an insurance cover going forward, for those pre-existing conditions.

I seriously considered just relying on the public health system, which is very good here in NZ. But there is the problem with wait times for non-urgent procedures and you still have to pay for elective and preventative things.

An osteopath I was seeing once told me he doesn't ever have health insurance, his view was you are effectively *betting* on getting seriously ill. That resonated a bit with me to be honest. You are saying that you expect to have something bad happen so that you get more out that you put in (via premiums). It is a sub-conscious state of mind that is almost willing your body to get sick, to get your monies worth. Thought it was an interesting view point.

In the end, with a young family and enough income to cover health insurance, we have decided to get it. It is good piece of mind and nice to know you are covered in the event of something nasty.

Thanks for chipping in - we've got the health insurance too, and the premiums are again quite a bit of money. We're fortunate to have pre-existing conditions covered under my employer's policy which means we're already about $20k ahead after a couple of relatively minor claims. Like you, we'll keep that one going for now.

networkn

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#1813624 6-Jul-2017 10:29

joff_nz:

networkn:

I agree you are underinsured. Bear in mind a lot of policies include clauses that say if the adjuster detects you are under-insured, they may decline your claim, or pay only the percentage you were correctly insured for.

I would consider 50K for life insurances exceptionally low, but I am guessing maybe you have no kids. I wouldn't consider life insurance under 250K, but more likely 500K.

For your car, it's fine if you self insure that, so long as you bear in mind, that if you hit a 300K car, and it's YOUR fault, they will come after you personally, you could lose everything. Not worth it in my opinion.

Given your situation, and the amount of premiums you pay, I would think you'd be better to work an extra 1-2 hours a week rather than worrying about something like you are.

Thanks - We actually do have 3 kids, but we also have a large home with a lot of equity and very good family support. If I passed away for example, my wife would sell and either buy a smaller home with no mortgage, or move into her parents family home. The life insurance amount was carefully considered and would allow her a year of no financial changes to get things setup as needed.

And yeah to reiterate - I'd never be without 3rd party insurance on the car

I don't know you, but I can tell you that with 3 kids and a house, there is little to no chance you have 25K of stuff in your house. In the event of total loss, you are talking about replacing everything, every bit of clothing, jewelery, furniture, appliance, gadget, toy, game, bed linen, towels, blankets.

We went through this with the insurance company a couple of years ago, they asked us to go through each room in the house and list everything over $200, we didn't even get through the top part of the house before we realized we were underinsured by at least 60%, and that was just listing things over $200.

You may not replace everything, but I'd still suggest you wouldn't get far kitting out a house with 25K.

empacher48

366 posts

Ultimate Geek

#1813626 6-Jul-2017 10:33

Don't forget in those policies there is some form of indemnity cover, usually up to a cap of a million dollars or so.

If there was an accident and was found you were legally responsible and the courts force you to pony up the costs etc, do you have the cash to do that?

Fred99

13684 posts

Uber Geek

#1813627 6-Jul-2017 10:34

I expect that price for contents insurance will go up considerably - if proposed changes to EQC do exclude contents from EQC natural disaster cover.

joff_nz

446 posts

Ultimate Geek

#1813630 6-Jul-2017 10:36

You may be right, and I would definitely review it, but to be honest we lead a pretty simple lifestyle without a lot of possessions, and certainly many that we could live without in the very unlikely event of a total loss. Maybe $25k is too low, but I'm confident $60k is unnecessary.

My question was intended to be more about the hypothetical borrowing to self insure rather than paying premiums to an insurance company, than the specific numbers. Maybe they're too closely tied together. Interested to hear anyone else's experiences with any kind of self insurance.

joff_nz

446 posts

Ultimate Geek

#1813634 6-Jul-2017 10:37

empacher48: Don't forget in those policies there is some form of indemnity cover, usually up to a cap of a million dollars or so.

If there was an accident and was found you were legally responsible and the courts force you to pony up the costs etc, do you have the cash to do that?

That's a really great point - I'm not familiar with this part of the insurance. Is it normally included in home/car/or contents?

joff_nz

446 posts

Ultimate Geek

#1813636 6-Jul-2017 10:38

Fred99:

I expect that price for contents insurance will go up considerably - if proposed changes to EQC do exclude contents from EQC natural disaster cover.

Yes and based on age, our life & trauma premiums will start to rise considerably over the next few years too for the same sum insured

empacher48

366 posts

Ultimate Geek

#1813637 6-Jul-2017 10:38

Just checked that it is included in both our car and contents. Have a look at your policy wording.

gcorgnet

1077 posts

Uber Geek

#1813660 6-Jul-2017 10:50

Are you really paying $100 per month for all these covers? I would be happy with that!
Thinking you might be missing a "0" here?

If not, I need to review my covers pronto

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