A really good question. Let's tackle over insurance first

With over insurance, in its simplest form, if the risk is not realised, you've paid more for the transfer of risk than you had too. What I'm meaning is if you don't die, don't have a trauma, don't have a loss of income or property, then the risk being covered hasn't been realised.

For example, if you have a $500,000 mortgage and have a $1,000,000 life policy and you make it to retirement having paid off the mortgage. Then you have likely paid double what you needed to, to transfer the risk. Assuming your need was limited to just the mortgage over that time.

Over insurance doesn't usually happen across all insurance products, it's too expensive for the majority of people. It usually happens in conjunction with being under insured in other areas. Take the previous example, $500,000 too much life cover for the need but no trauma cover, meaning over insured for life cover and under insured for trauma cover (and the other life benefits too).

When it comes to income protection, medical insurance & general insurance like house contents and liability. You can't claim more than the loss resulting from the situation.

For income protection, the maximum % of the loss of your income. For medical insurance the cost of the treatment, for your home the cost to rebuild or replace it.

The downs sides of over insurance are

• You end up paying more than you need to.
• Other areas may be underinsured as a result of budget constraints created by paying more than you needed to.
• You may not be able to claim everything you have paid premiums for.

The up side, if you have an event like a life or trauma claim then you could be creating wealth rather than just covering loss as these two policies don't rely on demonstrating loss at claim time.

Now for the other side, under insurance.

Unlike over insurance, under insurance can result in significant hardship and potentially be challenging to your health and wellbeing.

Why? you say

With over insurance you end up with too much money. With under insurance you end up with none to not enough, depending on the situation.

As a simple example, a couple, Jim & Bev, insure themselves for 1/2 the mortgage each with their life cover. Jim dies, half the mortgage gets paid but Bev, the surviving partner, only earns enough to cover living costs but isn't able to make the remaining half of the mortgage payment. As they needed 1 income for the mortgage payment and the other for their living expenses. This is under insurance and Bev faces the difficult decision of selling her home before she gets too far behind in the mortgage payments.

You could argue that Bev needs to review her living expenses, and yes this is an option, though potentially one that will still come up short.

Ok another approach, take the situation of Bev and Jim before Jim died, Jim suffered a heart attack and this resulted in him not being able to work for 6 months while he recovered. Because they only had life cover, Jim didn't have any support for his income outside any remaining sick leave and annual leave entitlements. Not having income protection or trauma cover meant he didn't receive any financial assistance when he had his heart attack.

Because his disability is from a medical condition, there's no ACC support either, so Jim & Bev would have to survive on Bev's income, again like the life situation above, it puts their home and lifestyle at risk.

Taking this a bit further, if Jim suffered depression then the only insurance that is going to work for him is income protection. This would provide two things, replacement of his lost income and provide for his rehabilitation and treatment.

What most people don't realise is medical insurance does not provide cover for mental health treatment, this is only found in income protection. With only 20% of the population having income protection there is a significant level of exposure for you when it comes to this area of health care, as the public system is very limited for the majority of situations.

With near to 40% of new disability claims being mental health related, this is a significant risk for everyone. The stat. I read in the NZ Herald earlier today says 25% of the population are dealing with a mental health situation at any one time. This may be minor with a bit of stress relating to say a motor vehicle accident or not getting home because of the weather (Wellington most nights) or it may be something significantly more severe. that you can't get out of bed because of your depression.

So under insurance, what's the problem?

• Under funding putting assets at risk.
• Under funding putting lifestyle at risk.
• Under insurance reducing medical treatment options.
• Under insurance reducing medical treatment outcomes.
• Under insurance puts your world at risk.

How do you solve this?

You sit down with an insurance adviser, again I'll do, and discuss the various risks you have and how you might mitigate, minimise or transfer them.

One high earning couple said to me, insuring our incomes isn't a priority as we could survive on one income, it might force a change in lifestyle, but it wouldn't put us at financial risk. However, one of us dying or needing medical treatment, we’ll need help there to ensure we protect our assets and we can access the most appropriate medical treatment.

In their case mitigating the income loss risk was justified without the need for insurance. Yes, there is the risk of both of them being disabled at the same time, likely to be very low risk and also likely to be caused by accidental rather than medical reasons, so they would have some coverage under ACC. This is unusual in most situations, but in this one reasonably justified. On the flip side they had clarity about the limits their financial position had and took appropriate steps to mitigate them in the areas they did require it.

Again it's about the discussion and testing your thinking against all of the risks. Road test your risk thinking with us to ensure you really have considered your options in a reasonable way.