Sorted's Excellent Article on Avoiding Scams

Sorted has published a great article by Tom Hartmann on avoiding scams. The impressive thing about this article is the 'hook'. Consumers aren't very interested in the more detailed aspects of financial planning. So how do you make this interesting? A picture of Robert De Niro helps, dressed as the character in the movie "Wizard of Lies". Link.

Sorted has a great suite of financial tools, but is missing one...

Sorted has this great suite of cool looking new financial tools - the kinds of calculators and planners with nice graphics and good step-by-step instructions that you would like to see from the Commission for financial Capability. Take a moment to check them out. Notice which area is missing? That's right, insurance.


Money week focus: good debt, bad debt, and what debt you need to insure

Money week has started out focusing on debt. Debt happens to also form the core of the capital needs analysis when insurance planning is being considered. So much so that typically insurance advisers start the needs analysis by aiming to clear all debt in the event of death, and add other needs on top of that. What's right and what's wrong with our view of debt. 

Diane Maxwell at the Commission for Financial Capability is quoted in this article by Tamsyn Parker at the NZ Herald on the subject of debt. It is worth taking in how people can make a decision to get into debt for items that would traditionally be called 'bad debt' - like borrowing for a holiday, or large consumer electronics purchase. Most people know that taking out a loan on such items is a poor financial decision - but they feel that they have worked hard and deserve this. Those views may not add up to you, but they are real for a wide range of people. The impetuous decision comes more easily under such a rationalisation. Whereas, to the person who has a rule 'I never borrow for a holiday' they then have to save. Saving gives you time to re-asses your goals. Do I want this holiday more than cutting six months off my wait to get into a home?  The nature of the rule is tricky to properly express. Some people say 'never borrow for a depreciating asset' this kind of definition tends to favour the purchase of physical property or listed investments. But what about education? for almost anyone under 35 with the ability, getting a degree in business, accounting, law, finance, engineering, science, technology, or maths will provide big dividends. It should not be excluded from the options. 

So how does this affect your attitude towards insuring debt? For me, it doesn't. I like the idea that in the event of my death all my debt is paid off and there is sufficient money to take care of dependents. But some attitudes towards insuring debt are changing. One bank even defaults their calculator to only insuring 50% of debt. That may well reflect the modern reality of two-income households, but given that life insurance is so cheap (and set to get quite a bit cheaper) for people under 45, then the trade-off in peace of mind might not be worth the extra flat white per week. It is a trade-off I would like the customer to make actively, but that would require an advice process. The overall approach suggests a process in which the belief is that the customer is highly price-sensitive. Yet our research shows that customers are not that price sensitive until they reach their fifties. They are more cover sensitive. Go back to the emotive rationale for bad debt and you will see that price wasn't the dominant factor in that decision either. It was how they felt about the outcome. Talking about outcomes enables the client to make a better decision. 



Sorted: Highlighting the Cost of Rate-for-Age Cover

Sorted has a blog and on it Tom Hartmann has written a thoughtful post about the cost of rate-for-age cover. The powerful image of a steep set of stairs brings it home (he lives in Wellington, so it is an easy image to identify with). I'm a bit biased about the article because it quotes me, but more importantly, it does nail the issue of rising costs.

Let me illustrate: Use a fairly ordinary package of benefits to construct the 'ideal': repay debt, life cover of 5x income, plus IP at 75% of income, to 65 on a four week wait. I've only allowed a typical, but very low, $50,000 of Trauma and TPD. I did not select the best options in IP. I left out health insurance completely. 

  • At age 35 the package costs just under 4% of income
  • At age 40 it will have risen to over 5% of income
  • At age 55 it will be over 15% of income
  • At age 60 it will cost about 24% of income

Those scenarios allowed for increasing income and reducing debt levels. Combine that with the 'ideal' package of home, contents, and car, and 'ideal' health insurance, plus, of course, the 'ideal' contribution to KiwiSaver... I don't know if there would be much income left. It is easy to see why people aged 50+ are shopping their cover around and cancelling chunks of it. That's because there is nothing 'ideal' about spending a quarter of your income on insurance.