Why aren't we prepared for the worst?

Swiss Re released some research recently that found Kiwis are at risk of financial hardship if the primary household earner passes away. We decided to find out more about what the mortality protection gap was, what it means for us, and how taking out life insurance might be able to help. 

Kresh Wright from Swiss Re chatted to us about what their research found, and why we're not prepared if the worst happens to us.

Welcome, Kresh. Thanks so much for being here.  

Hi, Riss, thank you for having me. It's great to be here.

Now, you guys surveyed Kiwi households recently and you had some quite interesting findings in a report that was called Closing the Mortality Protection Gap in New Zealand.

Now, a lot of what came out of that research was that a lot of Kiwis think if the primary earner of their household were to pass away unexpectedly, it would have quite a big impact on their family. Yet, only 39% of us which is you know, just over a third, have life insurance. So just thought we’d delve into this a bit more and look at what that actually means for people, what this mortality protection gap actually is, and what it means for everyday Kiwis. So could you maybe explain a bit more about what the mortality prediction gap actually is? And maybe paint a picture of what it looks like in reality? 

Yes, sure. Yes, so that's right. I mean, earlier this year, Swiss Re did survey over 750 Kiwis and the aim of that research was to understand, I guess what the protection needs are for New Zealanders. But also at the same time, what are the financial resources available to us? And also, what what is that level of risk awareness like as well. So you're right, our research did find that most Kiwi households are vulnerable to financial hardship if the primary earner in that household passes away unexpectedly. 

"Our research did find that that most Kiwi households are vulnerable to financial hardship if the primary earner in that household passes away unexpectedly." 

So in Swiss Re what we do is we measure this vulnerability, by calculating what we call a mortality protection gap. And to put it quite simply, I guess the protection gap is essentially the difference between the protection needs of a household and the financial resources available to sustain that family's future living standards in the event that the primary earner passes away. So to calculate this number, what we do is we look at the amount that's needed to replace the future income of the primary earner, but also add to that the amount that's needed to pay off their debts. And then we deduct from that the amount of existing assets that person had. So whether that’s savings, other assets like property, and of course also any existing insurance that's in place. 

"The protection gap is essentially the difference between the protection needs of a household and the financial resources available to sustain that family's future living standards in the event that the primary earner passes away." 

The number that we came up with as the protection gap for New Zealand is quite staggering, and that number was $670 billion. 

So and like you say, what it showed us is that most households in New Zealand are under protected. So 64% are under protected, and only one in five households have actually less than 10% of what they need to sustain themselves financially, if the primary earner passes away, so it's really quite shocking and scary to think about. 

I guess if you talk about $670 billion and trying to picture what that actually looks like for families, it’s a hard thing to do, especially when you're younger, you’re healthy, you’re fit, it's hard to imagine what life might be like if that changes. 

But what I would say is if you are the primary earner in your family group or in your household, think about what would happen if you pass away and think about the people who are financially dependent on you. 

And it could mean that, you know, your partner is impacted if they work part time or if they are at home focusing on caring for kids, then they might need to make a big decision to work more. 

It could mean that even just day to day expenses are a challenge to meet. So paying the rent, your groceries, your power, childcare as well. All those things could become that much harder to meet if the primary earner is no longer around.  

And then there's also just the cost of a funeral itself. I don't think many people comprehend that that itself is quite a significant expense that we need to plan for and think about (Editor's Note: You can talk to your financial adviser or insurance provider about funeral cover if this something you would like to plan for).

We probably just don't want to think about it at all, to be honest. 

Exactly, yeah

It's one of those things that seems quite confronting to think about that, like you say, especially when, you know, you feel like you are young, and you're healthy. And you think, oh, that's probably not going to happen for a while. Um, that number seems quite staggering to me. And I'm just wondering how it compares to other countries? Have you done research in Australia or other countries that you can sort of compare? Are we doing better or worse than other countries in the world?  

Actually, New Zealand is very much on par with Australia. So when we looked at the average protection gap at a household level, that number is very similar to Australia. We also did some research in other markets across Asia. So we looked at Hong Kong, Singapore, China. And when we compare ourselves against those markets, our gap is higher. 

And I think the main things that cause that are the fact that income levels are higher in New Zealand and Australia compared to say, the likes of Hong Kong and Singapore, which means the protection that is needed to replace that income is greater. 

But also debt levels in Australia, New Zealand are again, they're higher than in some of those countries. 

Okay, that's not good news. But maybe there's something we can do. Another question I wanted to ask is, it seems like younger and middle aged households are more at risk? I was wondering why this is the case?  

Yeah, that's right. And that was quite an interesting finding in our survey actually that that protection gap is really quite dependent on age, but also on wealth accumulation, I would say. So our survey showed that the gap was the highest in young households, and that's people around the age of 25 to 35. That was where it was the worst. And you can kind of explain this if you go back and look at the formula that we use to calculate the gap. 

So we're looking at, you know, replacing future income, paying off debt, and then what have you got saved up, or what insurance have you got already to cover that. So with younger households and younger people in general, they have a long working lifetime ahead of them, which means that future income when you add it all up is a bigger number which contributes to that need being higher. And again, as I said earlier, the levels of debt with again, younger people seems to be higher, because, you know, perhaps they’ve still got a student loan or at the stage where they're buying a house for the first time. 

So they've got the debt, they've got a lot of income they need to cover, but at the same time, they haven't had time to save and they haven't had time to think about accumulating other assets as well. 

So the thing we saw with New Zealand is that there's also a higher percentage of younger people in the population compared to some of these other markets in Asia. So that's why New Zealand looks a bit worse as well, compared to some of the other markets.

Interesting. Okay. So going back to something that you touched on before, you know, obviously, if you're the primary income earner in your household, you suggested, have a think about what could happen if you pass away? And I know that's something that I don't want to think about. And I'm sure most, most people don't want to think about.

Do you think that's a part of it, just that we don't really want to think about this kind of thing so we tend to put it off and avoid it? Or are we just really optimistic that the worst won't happen to us and it will all be fine? 

Yeah, I mean, I completely agree, it's not a nice thing to think about. But unfortunately, yeah, it's necessary. I mean, for New Zealand, there's actually a positive side to this, and that our research showed that New Zealanders are very mindful of the risks around death of a family member or their primary earner in their family. So 82%, in our survey, said they're aware of what could go wrong if the primary earner passed away. 

So that that's really good, the awareness is there. 

But unfortunately, at the same time, quite a big percentage, so about 33%, a third, underestimate how bad it could get. So they underestimate how much money they would need or they expect that they would get financial help from another source.  

So in the survey, some top reasons for not buying insurance were that that they might get help from family and friends, that the government might come to the rescue, that they might have some benefits from their superannuation plan that they could rely on. And some also said they would rely on donations. So things like your give-a-little type platforms, which of course do help in some situations. But of course, they're not guaranteed.  

So I suppose this idea of under estimating the amount of insurance you need is what we’re calling the perception gap. So understanding that, and helping Kiwis to understand what is out there, and what they actually do have in terms of protection is key to ensuring we have sufficient protection going forward, as well.

So I guess delving into that a bit more. And this might seem like quite a basic question. But what actually is life insurance? And what can it do for you? How can it help in a situation where the primary income earner whether that's yourself or someone else in your family does unexpectedly pass away? 

So I guess there's a few different types of life insurance out there. In New Zealand at the moment, I'd say the most commonly sold type of life insurance is term life insurance. And that essentially pays out your sum insured if death occurs within the period, while the term of the policy. Most death policies in New Zealand actually also make a payout on diagnosis of a terminal illness, as well, which can also be quite helpful for planning purposes (Editor's note: Not all policies will make a payout on the diagnosis of a terminal illness, so make sure you check this with your provider).

And then I guess, different companies will offer different tweaks on products as well. So in terms of the amount that you might insure, that could stay level for the entire period of the policy, or you can set it to increase or decrease depending on your needs. And similarly the premium rate that is applied to a policy, so that's of course how much you pay for your insurance, you can either try to set it at a level amount for the duration of the contract or it might increase every year as your risk of death also increases. 

So it's important also to know that with most insurance, that premium rates are reviewable, so things could change as policies evolve over time and as insurance companies gain more experience of those policies over time.  

I was just going to touch on the second part of your question around how it can actually help you in day to day terms. I mean first of all, I'd say you know even before that unexpected event of someone you love passing away it helps in terms of removing that worry about what might happen to your family and their financial future if you pass away. 

"[Life insurance] helps in terms of removing that worry about what might happen to your family and their financial future if you pass away." 

Of course once that event does happen then the insurance can help to firstly pay off any debts you might have, for example your mortgage, so your family doesn't have to worry about that once you're gone. And then again its day to day expenses that your family would have been dependent on you for, so again, things like your rent and your groceries your power, childcare, all those kinds of basics. And even you know things you were saving up for for the future like University fees, cars and even holidays you know that were all part of the plan it can help with. 

So then I imagine on the flip side if you didn't take out any life insurance and you are the primary earner in your household and you do unexpectedly pass away then all those things that your life insurance policy would have covered are now I guess the responsibility of those who are left behind, that's your family, you know they've got to foot the bill essentially. 

That's right I think that is essentially what it would come down to I mean of course there will be some of these other sources that would come into play but I guess if you have insurance that's what you can rely on to pay out when you die and some of these other sources are a little less certain in that respect. 

So if someone is thinking about picking out life insurance just sort of starting to think okay, I might need to get onto this and start protecting my family and ensuring that they're not you know, having to fork out all this money and go through all that stress if something does happen to me, where does someone start in New Zealand? Where should they go to look for information and find out more?  

Yeah, that's a good question because there's you know, there's lots of information online and I would say do some research online because it is valuable. Look at websites for organisations that you know and you can trust for that information.  

But I'd also say life insurance can be quite difficult to understand as well, and as simple as insurers do try to make their policies you know, things like the policy documents can be quite detailed. So my tip would be to find an expert, and that expert would be an insurance broker or a financial adviser because they can then look at your personal situation, what your needs are, and what you can afford, and come up with some options for you. 

And yeah, as I said before, you know, there is that perception gap that we saw in our survey, so a lot of Kiwis do tend to underestimate the amount of protection that they need. So I think an expert, an adviser, broker in that sense can really help you get the cover at the right level for you. 

And I'd also say, once you do have some cover setup, make sure you review it at regular intervals, because as you go through life, things will change. You'll reach different life stages and have different events occurring in your life, which will mean those needs change. 

"Once you do have some cover set up, make sure you review it at regular intervals because as you go through life, things will change... which will mean those needs change." 

So, yeah, it's just important to keep it on your list to review as well. 

Good tips there. One thing I'm also wondering is, there's obviously this gap. You know, Kiwis seem to be quite under insured when it comes to life insurance. Is the same true for other forms of insurance? Are we perhaps more likely to protect our pets, our property, our cars, than we are ourselves? Yeah, just wondering if you can shed any light on that, because I find that quite interesting.  

That's yeah, again, that's a really good question. I mean, unfortunately, at this stage, Swiss Re hasn't done any work looking into any kind of property insurance, car or pet insurance, but I think I can make a hopefully related comment, because one of the findings in our survey was that Kiwis do seem to have a greater concern for health risks and for retirement planning, versus death insurance. 

So these risks, I suppose, you know, health and retirement, they are a lot closer and maybe can be understood and grasped a bit more easily by us and feel a bit more real in that sense as well. So yeah, and in our survey, 38% of people said they were concerned about death, but more like 60% said they were concerned about just illnesses, health and retirement planning. So maybe that translates to some of the other insurances as well. 

And I guess probably when it comes to younger people too, you know, where that they see sort of death is quite far away - you'd hope. Maybe they're not so worried. Younger Kiwis aren't so worried about it, or thinking about it? Because it just seems yeah, so far. 

Exactly. That's not going to happen to me anytime soon.  

That she'll be right attitude. 

Oh, that's really interesting. Thanks for sharing all of that. I'm just wondering if you had any sort of last tips to offer anyone that might be thinking about life insurance. Maybe has thought about taking it out, but hasn't quite taken that step yet. Any sort of tips on what people could do to get started?  

Yeah, sure. And I guess I know, it can be quite a daunting task when you start to think about insurance. So I would say, well, my top tips would be, firstly, just take the time to understand things like how the policy works and when it will pay out. And also think, of course about when you do want a policy to pay out for you as well, and that that fits your expectations. 

I’d say also just you know, have a look around, of course, talk to the experts, but you know, do your own homework as well to make sure you feel you're getting a good deal for the benefits that the insurer is offering you. 

And the one thing I know insurers must do in New Zealand is to provide potential customers with their financial strength rating, which is really important as well, because at the time that you want that company to pay you, you want them to still be around and doing really well. So that's important.  

And maybe the last thing I'd say is you'd be surprised at how many people have insurance but aren’t aware of it. So what I would suggest as well is to check with your employer, you might have insurance through a group arrangement through work, or maybe you know, when you were young your parents bought a policy for you that you're not aware of. So check around and check whether you do have anything in place already, and then build on that if you need to.

Some great tips there. Thank you so much, Kresh. Really interesting discussion. Thank you for joining me today.  

No problem, Riss. Thank you so much again for having me. 

Final Note: In New Zealand, when you pass away your KiwiSaver savings get paid out to your estate. If you want to make sure that these savings will support your family when you die, you might want to consider putting a will in place).

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