Do I need a haircut?
“Do I need a haircut?” is not a question one normally asks a barber. Of course the answer will be yes. Likewise, “do I need insurance?” is not a question one normally asks an insurance salesman, especially when his/her income is derived from the sale of product.
Among the clients I meet there is traditionally a deep suspicion of insurance sales people and often (in my opinion) this is appropriate. All the statistics released by the life insurance industry point to the “fact” that people are generally under-insured. This may well be the case but I cant help but be suspicious of an industry that points out the general underutilization of the very product that it sells. It may well be that people are generally under-insured but I also hold the suspicion that among those that are insured, there are many that are in fact, over-insured.
Over-insured? How is that possible?
In my experience the greatest area of over-insurance is around disability and specifically income replacement cover. The usual scenario goes something like this…
The client is employed and is a member of the company retirement fund which has an income replacement disability benefit as part of the scheme. Typically this is 75% of the pensionable income (75% is international best practice – income replacement is never supposed to be an incentive to sit on the beach when you could be working). So for all intents and purposes the client is then insured to the maximum that he or she can claim.
In cases of over-insurance, the client also has some additional income replacement cover that they took out years ago (when they were still studying). They have stayed on the scheme because of the promised bonuses that they will receive some time in the future or on the mistaken belief that they will get paid if they are disabled and submit a claim.
If there is a valid claim, they will get paid – but not by both schemes. At claims stage, insurance companies typically aggregate the income received from all sources and will pay the balance of the 75% of income. So here is the problem and the over-insurance. If the external scheme pays, then the company scheme will probably not (to check this you can write to the company scheme and ask them how they would treat a claim in the event that you were also getting a benefit from the external (private) income replacement policy. They will write back and tell you that they will probably not pay. Probably not? What a waste of money – especially when statistically, your probability of being disabled is around 0.4%*. So why are you paying a(n addtional) premium for something that will probably not pay. You are over-insured and are wasting money!
As I see it, your group scheme membership is compulsory while the private scheme is not. So get rid of the external scheme – even if it means that you will lose some of the bonus – you could invest that money and the premium you were paying and you would end up with a bigger lump sum in the future.