Getting life insurance in place involves a lot of decision making, and choices around the ownership structure of your insurance policies are as important as any other. Keeping the ownership up to date as your life changes is equally vital.
A good insurance adviser will explain that the structure of the cover is just as important as the cover itself – this is because wherever the ownership is placed is where any pay-out will go.
These are some of the issues around the ownership of both personal and business insurance covers that you need to be aware of.
All polices can be jointly owned, and it is a good idea to make sure they are – for example, an income protection policy can be claimed by a spouse if the policy holder is incapacitated.
It is particularly important for life insurance policies. If you are in a relationship it makes sense that your spouse will be an owner on the policy – this means the policy will be paid out quickly and easily when it is needed.
If you are the sole owner of your life insurance policy this means the pay-out will go to your estate. If you don’t have a valid will it can take some time to be released. As insurance policies are considered relationship property under the Relationship Property Act, it could also be held in probate for up to six months.
The most common issues around policy ownership come into play when there is a relationship break up.
Firstly, if a former spouse or partner is an owner on the policy and the premium is still being paid, they will receive the pay-out. Secondly, if the policy is paid into the estate and it is held in probate, a former spouse or partner can make a claim on it as relationship property.
We had a client who found out his ex-wife was still paying the premiums on a policy on his life they were both the owners of. She was legally able to do this, and to receive the pay-out when he passed as it would go to the remaining policy owner.
The key is to keep your policies up to date and touch base with your adviser when you have any life changes, as they will know what needs to be done to make sure what you have in place still meets your needs.
Another issue to be aware of is insurance policies purchased through a bank. When you take out insurance with a bank, sometimes they own the policy, which means all the anniversary correspondence goes to them – which can make it hard for you to keep track of ownership, and if the policy is still relevant to your needs.
We recently carried out a review with a client who believed he had an income protection policy with a bank, but on closer inspection it was actually a debt protection policy. He was paying for a certain sum to be insured, however the wording of the policy was that “In the event of a claim we will pay you the lesser of the policy or the debt you owe us”. When we spoke with him he hadn’t owed this bank any money for six years – this policy was out of date and totally irrelevant to him, but he had been paying the premium the whole, time and would have received nothing.
There are some key issues around the ownership of business policies as well.
Where there are multiple shareholders in a business, those parties will often take out life policies for each other to the value of the shares. On the event of a shareholder’s death, their shares will pass to their estate, and the life insurance pay-out to the business will allow the remaining business owner to buy the shares back.
In theory, this works very well. In practice there are a few issues to be aware of, and systems you can put in place to prevent them.
While the shares pass to the estate, the directorship does not. This means there may be one director left, who is now solely in control of the company, and of course all its assets. And while the life insurance pay-out was intended for the company to buy back the deceased’s shares, if the premium has been paid by the company the sole remaining director is in control of that asset, and can quite literally ‘take the money and run.’ This can be true even if there is a shareholders agreement in place, because not all agreements deal with what is meant to happen to an insurance pay-out.
To mitigate this risk, the company needs to set up a ‘Buy/Sell Agreement’ and should set up an independent trustee to own the insurance on behalf of the business.
Families can fall out, and so can business partners. Who owns a policy and how it is structured are just as important as the cover itself.
Our Plus4 advisers have seen almost every scenario play out, so they have potential issues front of mind when they are helping you set up your policies. Having your insurance structured appropriately from the get-go is the easiest way to avoid issues.
It is also important that you see your adviser as part of your support network and get in touch whenever life changes. Doing so means you won’t end up paying for policies that you don’t need, or that won’t do what you want them to when you need them.
If you want to review your policies to make sure they are meeting your needs, get in touch with one of our knowledgeable and compassionate advisers.
Total and Permanent Disability (TPD) Cover is an easy one to explain, because it offers you just that – insurance cover should you become totally and permanently disabled.
There is some nuance to how it works, so let’s take a closer look.
TPD is its own standalone cover, however it is also often included as a part of your trauma policy. Like trauma cover, it is a one-off, lump sum pay-out, and is not an ongoing payment like income protection.
To qualify for a TPD pay-out, you must be totally and permanently disabled. While the wording varies between providers (check out more on how we use this wording to find the best policy for you here), most commonly it is that you are so disabled that you are unlikely to ever be able to perform your occupation again, or any other for which you are suitably trained.
There are two types of TPD; covering either your ability to work in your own occupation, or in any occupation. TPD may not necessarily involve a significant accident or illness. For example, just the loss of the use of a hand would render a surgeon or chef unable to work in their profession again.
When deciding how much TDP cover you need, we calculate it along similar lines to life insurance. While income protection is seen as a temporary prop-up to get you through a rough time, with TPD cover you want to be able to extinguish all your debt. You may choose to pay off the mortgage, use it towards medical care, improve the accessibility of your home or workplace, or towards keeping your business afloat.
It is always good to have your adviser take you through the process of setting the level of cover, and conduct regular reviews of your policies to make sure you always have the right level for your life stage.
As with trauma cover, you don’t need to be employed to get TPD cover. While the definitions and wording around what constitutes Total and Permanent Disability will change if you are not in employment, a pay-out will depend on whether you can perform home duties and activities of daily living.
The key difference is in what the claim assesses.
When making a trauma claim, the claim is based on the cause of the trauma, or the diagnosed event. For example, a stage 3 cancer diagnosis will result in a trauma pay-out, regardless of the anticipated outcome of that diagnosis.
A TPD claim however looks at the anticipated outcome of the event, regardless of what caused it. For this reason, it is a good idea to have both (and they are often bundled together as a policy), as the TPD cover will catch what the trauma cover does not.
It is always important to talk to your adviser to make sure you have the right policies to meet your needs, and that you understand what each of them covers so you have the right expectations at claim time.
Here are a few reviews from some of our existing clients around New Zealand