Do I really need insurance? And when can I cancel it?

Most people know they (probably) need some insurance. But nobody likes paying for it.

So, it’s common for investors to think: … “Do I really need this insurance?” or “When can I cancel my insurance?”

The truth is you might not need a whole heap of insurance. Some people do, and some people don’t.

That’s why in this article you’ll get an honest analysis of which insurance you might need … along with when you can cancel them. That way you can make an informed decision about which insurance policies you want (and which ones you don’t).

#1 – Life insurance

Life insurance is the most understood insurance.

If the worst happens – i.e. you die or become terminally ill – your partner or children will get a large sum of money.

Who needs life insurance? (Case study)

Sally and Simon are a couple in their 30s with a substantial mortgage on their own home. They also have 2 children under 10.

Life insurance could be a good option for this family.

If either Sally or Simon die, the surviving parent will have the money to continue life.

And while money will never take away the pain of losing a loved one – it can ease some of the burdens of looking after the kids on one income.

The lump sum can be set up as a monthly payment, which is a preferred option for some families. After all, a lump sum of $2 million in the bank can be uncomfortable to have all at once.

When can I cancel my life insurance?

Often as people get older they start to reduce their life insurance. This happens as couples increase their wealth, pay down their mortgages, and when the kids are less dependent.

For instance, Sally and Simon may want to dial back their life cover once their children become adults.

It would still be tragic if Sally or Simon passed away, but it wouldn’t be as financially devastating as if the kids were younger.

This is why you must review your policy regularly to ensure you’re not paying too much.

Who doesn’t need life insurance?

Generally, if you’re young, single and don’t have kids – you probably don’t need life insurance.

Ed McKnight, an economist at Opes Partners, says, “If I die right now, it won’t have a financial impact on anyone I leave behind. I have no kids and no personal mortgage.

“Sure, I have debt on my investment properties, but those could be sold if the worst happened. So, I don’t feel I need life insurance right now.”

If you don’t have people depending on you financially – or if you already have a lot of wealth, you may not need life insurance.

More from Opes:

• Landlord insurance - Do I need it? (Article)
• Trauma insurance - What is it and do I need it? (Article)
• Income protection insurance - What is it and do I need it? (Article)

#2 – Income protection insurance

Income protection insurance does what it says on the tin.

If you get sick (or pass away), the insurance company will pay you up to 75% of your income.

You’ll note that we just said that the insurance company may pay you out if you pass away. So, what’s the difference with life insurance?

While life cover pays out a lump sum to your family, income protection insurance pays your family a monthly amount as a proportion of your salary (up to 75%).

However, just be aware that when it comes to claim time you’ll need to provide proof of income and the illness preventing you from working.

This differs from other types of insurance, such as mortgage protection, which is a ‘guaranteed product’ (more on this below).

Who needs income protection insurance? (Case study)

John and Jack, both 38, own their own home and 2 investment properties. All 3 properties have a mortgage. They both work tirelessly to make enough money to pay their debts.

They have big dreams of travelling the world on a passive income and hope to retire at 50.

Income protection insurance could be the right fit for this couple.

Because John and Jack have 3 mortgages, they need both their incomes to pay the debt.

But what happens if either John or Jack get sick or made redundant? One of those incomes could temporarily (or permanently stop).

That could put them in a situation where they are forced to sell one of their properties, putting their retirement plan at risk.

That’s where income protection insurance could allow the bulk of their income to remain intact.

That could mean that John and Jack don’t have to sell a rental property to cover their living expenses while they’re short on income. That means their retirement plan stays unchanged, and the dream of retiring at 50 stays alive.

Some property investors think they can skip this type of insurance. They think, “I’ll just sell one of my properties to cover any expenses I need”.

But it’s rarely that easy.

For instance:

• Properties take time to sell; you can’t instantly access the money

• If you sell at the wrong time, you may sell a property for less than you bought it for

Not to mention, selling a property may put your overall retirement strategy behind.

When can I cancel?

As Jack and John get older, they are likely to have paid down more of their debt and probably gained more assets too. They won’t need income protection insurance at this stage.

Who doesn’t need income protection insurance?

If your income stopped tomorrow, how long would it take before you run out of money?

For some people, the answer is not very long. They’d be on the street in a few weeks.

But, for others, they’d be just fine. We worked with an investor who had $2 million saved in the bank; they’d made money from selling a few rental properties.

Even though this person kept working, they no longer needed income protection insurance. If they lost their job or got sick, they had lots of money available.

#3 – Mortgage protection insurance

Mortgage protection insurance works the same as income protection. It will mean you don’t lose your home if redundancy, an illness, accident (or death) prevents you from earning an income.

However, there are some critical differences in how this sort of insurance is set up and when it comes to claim time.

Who needs mortgage repayment insurance? (Case Study)

Bob and Susie have recently bought a house together. It’s their first home, and they worked hard with the bank to get their mortgage approved.

They both earn a good income working in the IT industry … and they need two salaries to pay the mortgage.

What happens if Bob or Susie get made redundant? After all, restructures are common in IT.

Because they’re on good incomes, they can’t just take any job. Instead, Bob and Susie will need to find a job that pays a similar salary to their current one. That’s so they can afford to pay their mortgage.

Finding the right job could take time … and they’ve still got to pay their mortgage in the meantime (now with only one income).

That could cause financial stress; in the worst case, they could be forced to sell their family home. That could mean downsizing their home or going back to renting.

But, if Susie and Bob took out mortgage protection insurance, it could be a different story. Their mortgage would still be paid, and they could then take their time to look for a job that pays them what they’re worth.

Mortgage protection insurance would give them the breathing room to get their life back on track.

When can I cancel?

Mortgage protection insurance isn’t necessary for people who don’t have a mortgage. And it may not even be required if you have a very small (or manageable) mortgage.

So, let’s say Bob and Susie eventually make it to retirement and become debt-free – they no longer need this type of insurance.

Of course, if Bob and Susie become mortgage-free before they retire, they can cancel this earlier than expected.

Who doesn’t need mortgage repayment insurance?

As mentioned, you don’t need mortgage protection insurance if you don’t have a mortgage.

But, if you have other types of insurance, you might not need mortgage protection insurance either.

For instance, if you have life insurance, income protection insurance and trauma cover, do you really need mortgage protection insurance?

Some people will say “yes” because they like covering every base. But, equally, some people will say, “No, we’re comfortable with the risk.”

#4 – Trauma cover

Trauma cover will pay out a lump sum (a hefty payment of cash) if you get a serious health condition, such as:

• Heart attack (cardiovascular)

• Stroke

• Cancer

This money gets paid out immediately, so you have the cash to pay for medical expenses and make a tough time a little bit easier.

This means you won’t have to wait for the money to come if you are diagnosed with one of these devastating illnesses.

This differs from income protection insurance, which has a wait period.

Who needs trauma cover? (Case study)

Jane has been married for 20 years and has a teenage daughter. She and her husband are in their 50s and have been diligently paying off their own mortgage. They also own 2 investment properties in Christchurch.

Jane is a teacher, and she loves working with children.

But then one day Jane gets diagnosed with breast cancer after a routine check-up. She and her whole family are understandably devastated. No-one wants this.

It’s treatable, but she has to get chemotherapy for a few months. The doctor says she needs it “sooner rather than later”.

Technically, Jane can continue to work … but she doesn’t want to. She would rather focus her attention on getting better. She also wants to give herself time to be in the comfort of her own home when she starts getting sick.

This is where trauma cover can make a hard time a little bit more bearable, because it can fill a gap income protection insurance won’t.

For instance, an income protection policy will only pay out if a doctor says you can no longer work. Unfortunately, doctors can’t do this for cancer (unfair, we know).

When can I cancel?

Jane is not far from retirement, so she may not need trauma cover once she retires. If she does get sick, she won’t need to take time off work (she’s retired).

And as long as she thinks she’s got enough money to pay for any other medical care she might need.

Who doesn’t need trauma cover?

I once worked with an investor who had a hefty $14 million portfolio. He’d invested this in shares, funds and savings. He decided not to get trauma cover because, in the worst-case scenario, he had enough money to look after himself.

This is what’s called ‘self-insurance’. That’s where if something goes wrong, you can look after yourself.

Don’t worry. You don’t need $14 million in the bank before you can self-insure. You just need enough assets where you’d feel comfortable (financially) if you got a severe and life-changing illness. If that’s you, you may not need trauma cover.

#5 – Total permanent disablement insurance (TPD)

Don’t skip this section. It will shock you.

Total permanent disablement insurance (TPD) will pay you a lump sum of money if you can’t work. It kicks in if you are permanently disabled due to an accident (or illness).

What do you imagine when you picture someone who would get a payout from ‘total permanent disablement insurance’?

Possibly someone stuck in bed all day because of an accident. As our following case study shows, that’s not always the case.

Who needs total permanent disablement insurance? (Case study)

Sarah is a surgeon and is the sole breadwinner in her family.

She earns a significant income, so she goes to work, and her husband looks after their 6 children.

But one weekend, Sarah goes skateboarding with her son. She has an accident. Thankfully she is mainly unharmed, but the accident causes her to lose a finger.

While that might not be the end of the world for most people, this accident could jeopardise her family’s livelihood.

This is where TPD can be valuable because a total disablement is easy to prove (in this case). Why? Sarah needs her fingers to be a surgeon.

However, for other occupations it can be a little bit more challenging to prove total disability.

For instance, an accident that leaves you paralysed from the waist down won’t leave you totally disabled if you work from an office at a desk.

This doesn’t mean it’s impossible to get TPD. It’s just more complicated.

For instance, I once worked with a person who was a horse dentist (yes, a dentist for horses).

Unfortunately, she got kicked in the head by a horse. The head injury was only temporary, but her debilitating fear of horses was permanent. I helped her make a claim, and she got TPD.

Ultimately, she became a helicopter pilot, and the insurance company paid for her retraining. That was part of her insurance.

When can I cancel?

Total permanent disablement is the type of insurance you cancel when you stop working or when you can self-insure.

Who doesn’t need total permanent disablement insurance?

If you work a standard desk job you are less likely to need TPD than someone with a physical job.

Similarly, if you have lots of transferable skills, you are less likely to need this type of insurance because you can switch jobs.

Both the case studies mentioned above were women who earned high incomes and worked in specialised industries.

If they could no longer do their specialised jobs, they couldn’t earn those high incomes.

You may not need or want this insurance if your work isn’t as specialised.

What insurance do I need?

The key message here is that insurance is not “one size fits all”.

You may need some of the insurance policies mentioned on this list, but some might not be the right fit for you.

This is why it’s essential to use an insurance adviser to get the right policy for you.

A good insurance adviser will help you figure out:

• Which insurance policies you need (and which ones you don’t)
• How much insurance you need (e.g. $500k of life insurance vs $1m)
• Which insurance company is the right fit for you
• When you can cancel your policies

The answers to these questions are technical … because insurance companies have a lot of fine print in their policies. So the right amount of insurance for you will be different from most people you know.