KiwiSaver and Insurance: Assessing lifetime financial needs

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.