KiwiSaver and Insurance: Assessing lifetime financial needs

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As we approach a significant debate on whether insurance should be integrated into KiwiSaver, I personally feel we should shift our focus towards a more fundamental and engaging topic: the assessment of financial needs for one's entire life.

Tuesday, April 9th 2024, 6:00AM 2 Comments

by Russell Hutchinson

Regardless of individual stances on KiwiSaver's expansion, the conversation invariably leads us to the concept of indemnity and lifetime financial planning. This is the space where we realise just how much closer to risk management planning superannuation is, than, say, investment management.

First, we seek to understand indemnity. Indemnity, the principle of being restored to a pre-loss financial state, is achievable monetarily but often unattainable in physical terms. Let’s set aside temporary disabilities and consider permanent ones that preclude participation in the workforce. Such scenarios necessitate a financial buffer substantial enough to cover a lifetime, just like superannuation:

The combined total of your income cover, total and permanent disablement, and trauma insurance should be sufficient to sustain you for the rest of your life. This need correlates with the purpose of superannuation savings; to provide financial security throughout your post-retirement life. Both assessments are complex, hinging on factors such as work duration, lifespan, savings rate, and expenditure. Since these variables are largely unpredictable, estimates and scenario planning play a critical role. All will be highly sensitive to these assumptions.

Insurance products adeptly manage several aspects of this financial equation. Adequate insurance coverage ensures that even an early onset of disability doesn't derail financial stability. Conversely, investing for retirement is a long game, requiring time and consistent effort. A practical approach often involves starting with substantial insurance coverage, which is gradually reduced as wealth accrues, allowing increased contributions to retirement plans. This transition reflects a convergence of insurance and investment needs, employing similar planning tools, such as 'real-age' calculators. These tools offer a nuanced view of life expectancy, aiding in more accurate financial planning. If trauma or disablement reduces life expectancy, that should be considered in the planning for retirement.

Revisiting the Debate Over KiwiSaver Inclusion

Given the interrelated nature of insurance and retirement planning, some argue for their integration within KiwiSaver. This perspective, however, does not fully credit your role, in providing financial advice. You already have the opportunity to provide holistic services that encompass both retirement planning and insurance needs, some of you already do. Many, though, limit them to no-advice or very limited scope services, which I think probably undersells the value of what you do. Tailoring these services to individual client requirements ensures a comprehensive approach to lifetime financial planning. Let’s first encourage people to seek the solution that exists.

The debate over KiwiSaver's expansion into insurance is more than a policy discussion; it’s about understanding and planning for life's financial journey. While tools and estimations provide guidance, the expertise of financial advisers is pivotal in navigating this complex terrain. Automatically including “x times income” life and TPD may cause as many problems as it solves and may add to that the hazard of reduced advice-seeking. Advisers are uniquely positioned to consider the entirety of a client's financial picture, crafting strategies that balance insurance needs with long-term investment goals. This comprehensive approach empowers clients to make informed decisions for their financial security, both now and in the future.

Tags: Russell Hutchinson

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