Trimming back your budget? Make sure you understand the consequences before cancelling or changing your health, income, life, or trauma insurance cover.
When you’re struggling to pay the bills, most people start looking at their expenses and asking themselves: do I really need that? For many people, insurance is the first thing on the chopping block. It’s sometimes seen as a lot of outgoing money with no tangible or direct positive outcomes from it.
Insurance is something you should be frequently checking; your circumstances are always changing, and your cover needs to reflect that. But if you cancel or change your insurance provider or package without serious consideration, there can be unintended consequences which are irreversible.
Before minimising, cancelling, or switching insurance providers, there are a few things you need to consider.
What If the Worst Happens When You’re Uninsured?
For every disaster in NZ, there are stories of those who, for various reasons, opted out of insurance cover.
In the Christchurch earthquakes, John Taylor had recently opted out of insurance. Martin Francis stopped paying his insurance company when they had a disagreement after a few burglaries. A third of homes affected by the Auckland Anniversary floods and Cyclone Gabrielle were uninsured, largely leaving owners with no clear path forward to rebuild or renovate their properties.
Maybe you decide income protection insurance isn’t required, then you fall seriously ill and can’t work. You need to save a few hundred dollars, so you cancel your trauma insurance right before you have a heart attack. Or in the worst case scenario, you cancel your life insurance and are diagnosed with terminal cancer weeks later.
The worst frequently happens. Don’t think it won’t happen to you. Insurance is planning for the unintended, the unplannable, the unimaginable.
When You Resume Insurance, Your Cover Will Have Changed
You decided to quit your health, income protection, trauma cover, or life insurance in a tight financial spot. But then a few months or years later, your income is stable again and you want to restart it. But this means starting the underwriting process all over again. The insurance company goes through all the risk you present to them from scratch, including a fresh detailed look at your medical history. This presents a few big problems.
To begin with, you’ll be older than when you first took out your policies, which straightaway incurs a bigger premium. Then, you may have more conditions or health issues that you didn’t have previously, which are now exclusions, stand-downs, or limitations on cover. Insurance will often require medical tests and exams which may increase your premiums if they are unfavourable- things such as high cholesterol, heart disease, or if you’re overweight.
Basically, if you found a suspicious (but ultimately harmless) lump in that time period which required a biopsy, it may mean you won’t be covered in the case of cancer. If you start feeling run down and it turns out you are diagnosed with multiple sclerosis, you won’t be covered for that. Imagine if you decide to dump your medical insurance and rely on the public healthcare system, only to be diagnosed with an auto-immune disease and the treatment isn’t funded under the public system.
You Will Lose Your Loyalty or No Claims Discount
When you restart insurance, all goodwill between you and insurance company is gone. Those years of loyalty and no claims discounts mean nothing. You’ll be back to the full premium payments with no acknowledgement of your previous business with them.
Switching Providers to Save a Few Dollars May Cost You a Lot
Switching to a new and cheaper insurance company may be tempting. But this comes with risks too. Once again, losing that loyalty/ no claims discount is a big disincentive. But the biggest worry about this is ensuring you have equivalent cover. That means what you think is covered is, and there are no holes in your policies. For example, you may think that your laptop is covered by your insurance because it was on your old policy. You take out the new cheaper policy, then your laptop is stolen. You call your new insurer who says because it is a laptop, and designed to be taken outside the home, it’s not covered. The same unexpected changes and exclusions can happen with bicycles, jewellery, art, or other items over a certain value, and a raft of other things.
Also be careful about which insurer you choose. Frances Rowling was told, weeks after the Christchurch earthquake, that her insurer had gone into liquidation and all her policies were cancelled, with no payout ever to come. What’s cheaper may not always be the bargain it seems.
Our Advice If You Need to Save Money on Insurance
If you need to trim your expenses, and insurance is part of this, it can be done. But it needs to be done in a way that minimises your exposure to risk, ensures coverage of all your assets, and still keeps you safe from financial disaster.
The first call should be to your insurer to chat about the policies, if there are any ways to bundle things together to get a discount, if you’re covered effectively, and if they can give you any discounts. Sometimes, if you’ve repaid all your debts, have no dependents, and have plenty of savings in the bank, it could make sense to save on those premium payments.
It’s also worth reducing your cover, increasing the excess/ deductible, increasing wait times for things like income protection insurance, or a full restructure of your policies. But, unless there’s compelling reasons to do so, don’t cancel insurance altogether.
Then, speak to a professional. Get advice from your financial adviser who understands insurance. Don’t leave this to chance; the outcomes could be catastrophic.