Explaining annuities

You’ve probably dreamt about what you would do if you won $1 million dollars on Lotto. But what if someone handed you $600,000 and said it had to support you for the next 30 years?

That’s the situation today’s young and middle-aged KiwiSavers will be facing when they retire.

The conundrum about what they should do with the money is sparking renewed debate about annuities – one of the easiest, and most endangered, ways to make sure your money lasts as long as you do.

An annuity is essentially a bet with an insurance company. You hand over a lump sum in return for receiving set monthly payments until you die.

You are betting that great-grandpa’s genes will keep you alive so you can go on collecting the money long after the original lump sum would have run out.

 

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New Rules governing the process of buying insurance

On 1 July 2011, new regulations came into force, dictating the steps that must be adhered to when an Adviser deals with a Client. It is not that much different than the way we were operating prior to 1 July – the most noticeable difference is the amount of paperwork the client now has to wade through and sign off on.

Many people find it all a little over-the-top, but the process is dictated by law, now, so patience is appreciated. The Story below has been doing the rounds for many years (orginally English I understand), and is only intended for a laugh…but with good humour, it does illustrate a real point. The same principle can be applied to many other businesses and activities now. Enjoy!

Buying Shoes (if Shoe Sales were regulated in the way Insurance Sales are now)

 Customer: “I’d like to buy a pair of black leather shoes, please”

 Salesman: “Sir, if it were only that simple. Here’s my card and here’s your Buyer’s Guide.”

“What’s this for”?

 “It tells you that I can only talk to you about shoes and allied products sold by this shop. I can’t talk to you about shoes sold by any other shoe shop, nor can I give any advice on, say, sausages, for example.”

 “Huh?”

 “Probably the best way to proceed is to show you where we fit into the footwear industry. We buy in most of our products from the Far East at a fairly modest price and sell them on to the public at a considerably higher price; but of course, out of the mark-up we have to pay for transportation, import duties, rent and rates, display, staff, sales staff, cleaners and administration, etc, and our shareholders have to be paid a dividend out of the remaining profits. Not many people think about this when they buy their shoes, but we think it’s important. With this in mind, I’d like to ask you a few questions to make sure you get the shoes, or even boots, which are exactly right for you. It may be that when we have all the facts, I recommend that you do not buy my footwear at all. May I proceed?”

“What do you want to know?”

“Well, how many arms and legs have you for a start?”

 “What have arms got to do with shoes?”

“Well sir, if, for example, you only had one arm and I sold you a pair of shoes with laces, that could be construed as bad advice by LAUSTRO”.

“What is LAUSTRO?”

“The Laced and Unlaced Shoe Trade Regulatory Organisation.”

“What do they do?”

“They put the boot in. A friend of mine had to leave the industry.”

“What did he do wrong?”

“He sold a pair of carpet slippers”.

“What’s wrong with that?”

“Turned out the guy didn’t have carpet. So you see, I need to build a full picture for you. For example, do you need shoes for business or pleasure, or business and pleasure? How many shoes do you have already?

“How many brogues, casuals, sports shoes, slippers, sandals, gumboots, etc do you have? How many suits? What colour are they? Do you have athlete’s foot? Can you touch your toes? Any corns or bunions, or does your family have a history of dropped arches? What kind of socks do you wear?

How often do you cut your toenails? How much do you earn and what is your overall clothes budget? ? Well, thank you for that information. I’ll give it some serious thought and- get back to you”.

Two weeks later…
“Good morning, sir. I’ve given serious thought and what you need is a pair of black leather shoes”.

“Isn’t that what I asked for in the first place?”

“With respect sir, you have now had the benefit of my professional advice, based on all the relevant facts as given, and you now know with some certainty that what you need is a pair of black leather shoes. All the guesswork’s been taken out of it. Here’s your Reasons Why letter. I recommend that you buy these black leather shoes because they’ll keep your feet dry, match your suits, look smart and you can afford them”.

“Well, I’m glad that’s settled.”

“You want the shoes, then?”

“Yes, please.”

“Right, if you’d like to complete this application form, here’s your illustration, which I’d like you to sign. It shows a complete breakdown of costs.”

 “Your Product Particulars describe in great detail how the shoes are made and the Key Features are a summary of the product’s particulars, highlighting the risk factors.”

“Risk factors?”

“Yes. For example, if you live too long, the shoes may need repairing. On the other hand, if you die before you’ve had your wear out of them, I’m afraid there’ll be no refund, even if they don’t fit any other member of the family.”

“I see…”

“So, just to recap, you’ve got my card; your Buyer’s Guide; Product Particulars; Key Features; Illustration; Statement of Suitability. You will get a letter from the Shoe Manufacturer telling you that I am authorised to sell these shoes, and also a “Free Look” notice. You can return the shoes within 14 days and have a full refund if you don’t like them for any reason. Also, I just need proof of your identity, as you are not known to me and we need to establish that you’re not a terrorist…

Oh – and just one last thing sir, do any of your friends require shoes, and would you be happy to introduce me?”

What motivates people?

I’d recently come across a quote from one Edgar Thomas Howe - an American author & editor (1853-1937). He is reported to have said (please excuse the out-dated sexist construction!) “A good scare is worth more to a man than good advice”. This pithy observation clearly has a ring of truth, and I found myself wondering just how true this is in my business and among my clients.

In this business, it is essential to go forth and FIND potential customers. It is said that insurance is “sold, not bought’. That’s true to some extent: I provide advice and people either act on that advice or not, as the case may be.

But from time to time, I am approached by a client, or a friend of a client, seeking insurance cover. This is unusual behaviour…generally, people may INTEND to do it (for years on end even) but it usually take an approach by a specialist adviser to spur people to action. (I recall once, about 15 years ago, watching as a gasping, limping man of not a very young age, struggled all the way up the stairs to our second floor office. Once he caught his breath, I asked how I could help him. The reply was not surprising – he wanted medical insurance because he’d just been told he needed an operation! Not much chance of that…) 

So, I reviewed several of the clients who have come to me looking for cover, or MORE cover. A common theme emerged: in all eleven cases I studied, these people had taken action because they knew, or knew of, someone who had suffered a major health event. They had therefore seen, up-close-and-personal, exactly what the financial consequences were for these people. They had become acutely aware of how real those consequences are, and were concerned to make sure they could do what they could to protect themselves and their loved ones.

I asked each to gather more information from the friend/acquaintance, of which seven were successful. This information was anonymously shared with me and I can summarise it for you now.

Most people will agree that insurance premiums seem like wasted money most months, and darned expensive. I hear it often and feel the same way. However, I am privileged to be there when a claim occurs and, gosh! those insurance premiums suddenly seem to have been very cheap indeed. Insurance is a little like buying a Lotto ticket, but it’s one you hope you will never collect on.

Anyway, of the seven cases on which I received feedback, there were three cases of cancer, two heart attacks, a stroke, and a long-term disablement caused by stress & anxiety. None died as a direct result, so they had to carry on as best they could. Of these, only three had adequate insurance cover, two had some cover but minimal (less than half what they needed), and the other two (one of the heart attacks and the stroke) had nothing in place at all.

These two people were forced to bear the financial consequences themselves, and to look to the State for financial assistance while they could not work. This is generally agreed to be an on-going, humiliating experience. Over time, they found themselves being forced to consume their accumulated assets, reducing their families’ lifestyles drastically and destroying their longer-term financial future.

So, in the end, in all seven cases, the cost of insurance was paid  - either it was paid by way of a managed regular premium in advance, or as an unknowable, drastic and long-term cost, paid not only by the  person suffering the health event but also, more importantly, by their families.

If you’d like to review your current cover, don’t wait till we get to your review date – drop us a line and we’ll get onto it immediately.

Mike King

Prosperity PLUS

The Importance of Having Medical Insurance

237-doctor-t-shirt

An associate of mine was popped into a private hospital 3 weeks ago to have a stent put in his heart. It was a straightforward procedure, he was in hospital for 24 hours and was back at work within 48 hours. He has medical insurance and was able to arrange to have the procedure within an afternoon of his Doctor recommending it. A week later, he received the statement of the bill that insurance company paid – $23,000 for the procedure and $2500 for hospital costs.

He checked in with the local hospital, and the waiting list for that same procedure was 18 months, at the regional hospital they said he could not go on the waiting list, as it was full.

So what if he was not covered by his health insurance? He could have gone on the waiting list, or wait to go on the waiting list, or he could have personally paid to go private. How many people have a spare 25K to get an easy heart procedure done?

After spending some time trying to get figures of how much medical procedures cost in NZ, I could only find some figures from 2008. I would guess that the costs have increased by at least 10-15% but take a look.

Do you have this cash in a bank account incase you or a family member needs surgery?

*As at February 2008 (incl.GST). Procedure costs will vary depending on the location, the medical practitioner/s and any medical complications, and the medical procedure and technology used.

July Reading Round-Up

Diana Clement: Start getting smarter about dumb debt (Click here…)
“Dumb. It’s a four-letter word that describes everyday things people from all walks of life do with their money.” (NZ Herald)

Consumer confidence ‘back to normal’ (Click here…)
Wellingtonians are becoming more gloomy about the city’s economic future, Aucklanders are the most optimistic in the country, and there is growing confidence among the dairying provinces of Taranaki, Waikato and Southland. (Stuff)

Insurers eye 20pc premium rises (Click here…)
New Zealand’s biggest residential insurer, IAG, intends to raise premiums about 20 per cent on average. (Stuff)

Dealing with bad financial service (Click here…)
Seeking resolution to disputes arising from financial service transactions has become a whole lot easier for consumers under new rules forcing financial advisers and service providers to take part in independent dispute resolution schemes. (Stuff)

Saving for a windy day (Click here…)
The first post-budget KiwiSaver stats indicate the scheme is sailing on, unaffected by the changed conditions. (NZ Herald – Inside Money blog)

Mary Holm: Making a monkey of the market (Click here…)
Mary answers readers’ questions about index funds, investment selection and KiwiSaver. (NZ Herald)