Discover why most life insurance policies

will never pay out!

Find out what most Kiwis are never

told about their life insurance - and

how simple it is to fix!

L I F E L I M I T E D

2

Contents

Perception versus Reality .................................................... 3

What space is to size, distance is to value ............................. 4

Deception or Illusion .......................................................... 5

The Facts are: ................................................................... 6

The right question .............................................................. 6

A quick history lesson ......................................................... 7

The current position for Kiwis .............................................. 8

Stepped Premiums ........................................................... 10

Level Premiums ............................................................... 11

Mythbusters ............................................................... 12-13

How does this affect me? .................................................. 14

A difficult pill to swallow ................................................... 15

Why have I not heard of this before? .................................. 16

Clients ..................................................................... 16

Brokers .................................................................... 16

Insurance companies & Banks ..................................... 17

Your notes ...................................................................... 18

So what makes us the experts ........................................... 19

No part of this publication, may be reproduced in part or whole without written permission of the copyright

owner. The illustrations and examples used in this publication in relation to level premiums are the intellectual

property of the copyright owner and may not be used without the written permission of the owner.

Find out how it is not always comparing

apples with apples and that not all

apples are created equal.

Firstly we need to

understand why

our perception of

things is often not

the reality.........

Copyright © Compass Life Limited 2009

3

This is one of those illusions that no matter how many times

we look at it and know the answer, it is hard to see these

shapes as being exactly the same size. Yes exactly the

same.

The reason for this is our point of reference or comparison

is focussed where the shapes are closest. We are comparing

the bottom of A with the top of B. Our mind is deceived by

the relationship of the shapes to each other and their

position.

I know you want to put them on top of each to prove this to

yourself, trace one shape out and then compare them.

The point is, if you don‟t know how to make the correct

comparison you can easily be mislead.

Most people, their broker or even bank will make this same

mistake with life insurance. Hard to believe? - Read on.

Although as children our perception of the sun and the

moon was that they were of a similar size, our education

has taught us about perspective and distance and we

now know differently.

The amazing coincidence is that the sun is actually 400

times larger than the moon, however it is also 400 times

further away from us creating the illusion that they are

the same size.

Which is bigger, the sun or the moon?

Perception versus Reality

Which shape is bigger A or B?

A

B

Why does the moon appear

bigger when it is lower on the

horizon?

In the vast expanse of the sky when the moon is

high it appears small; when it is low on the

horizon close to houses and trees it appears large

because we have a reference to compare it to.

That‟s right these two moons are the same size!

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What space is to size, time is to value - Plato

“In the same way that optical illusions fool our eyes -- and fool everyone‟s eyes in the same

way -- Gilbert argues that our brains systematically misjudge what will make us

happy (or wealthy). And these quirks in our cognition make humans very poor predictors

of our own bliss.” - Ted.com

Studies by social psychologist and Harvard professor Dan Gilbert

demonstrate how humans are not good at judging value over time:

Hopefully the obvious:

Would you like $50 now or $60 now? That is easy ...... more is always better.

Would you like $50 now or $50 in one month? Easy too......now is better than later.

Now it gets harder:

Would you like $50 now or $60 in a months time? Hmm...most people take the $50

now. It takes 100’s sometimes 1000’s of percent interest (annualised) for people to delay

gratification.

Would you rather have $50 in 12 months or $60 in 13 months? Now...most

people reason I’ve already waited 12 months what’s 1 more month and take the $60 in

13 months. See how time has distorted the value, by month 12 you still have to wait the

same one month.

This demonstrates how time distorts and confuses our sense of value over time, the same

as space distorts size like the moon on the horizon. When we can see it and compare it to

houses and trees it looks huge and yet in the vastness of the sky when it is high it looks

smaller.

Would you rather spend $15/month or $30/month? That is easy if it is the same thing we

get over the same period of time, but what if you knew the $15/month will increase each

year and far surpass the $30/month as it remains the same. The answer isn‟t as simple

unless we have all the information.

Now I think we all know the answer to this

one. If we need to ask the question, it‟s likely not our pants that we need to

change, it‟s our diet. The truth is that some clothes can help us

appear slimmer, for example vertical stripes or wearing black. But did you know

the right outfit with horizontal stripes will actually appear 6% slimmer than vertical stripes?

And the trick to wearing black or any colour

for that matter is not segmenting our body with differing colours top and bottom.

Does my bum look big in this?

Helmholtz squares 1866

New studies show....(well in 1866)

People generally accept the fact that

vertical stripes can make something look

thinner, most don‟t know that it was

documented back in 1866 that horizontal

stripes can be even better. Go on—Google

it!

5

Deception or illusion?

Some insurance companies and banks deliberately try to create an illusion of low

premiums and hide the fact that they increase to the point of being unaffordable

later. We believe this to be deceptive. For example, Westpac Life insurance have

a whole page showing the future cost of your premiums. It is quoted per $10,000

worth of cover less any discount you may have. We feel this is a deliberate

attempt to hide the true cost to the customer.

There are also a few main-stream insurance companies who discount the

premiums for the first few years to create the illusion that their products are

cheaper only to sneak them up later. There are many brokers and advisors who

are happy to sell these to the uninformed public. It is the lazy way of making a

quick buck, selling primarily on price. We believe everyone has the right to being

fully informed, educated and then given the opportunity to make an informed

choice.

When has cheapest ever been best? Everyone knows

taking a cheaper product will cost us more over the long

term. Sure, if you only need something for a specific

purpose and don‟t require it long term the cheaper

option can be better value. When you buy a $20 electric

drill from the Warehouse it works perfectly for the few

holes a year you might want to drill or for a weekend

project. But for an electrician drilling holes everyday, he will purchase something

designed and engineered to last the distance. The $20 drill isn‟t going to last the

distance or represent good value long term.

When we ask people how long they want their life

insurance for, they often laugh and think that we are

asking when they are planning on dying! After all, isn‟t

life insurance something you should be able to keep as

long as you want or need? Unfortunately, what most

people are asking is for the $20 electric drill to last a

lifetime. Even the check-out operator will tell us it

won‟t last that long!

So let‟s see how we got to this sorry state.......

There is nothing in the world that some man cannot make a little worse and

sell a little cheaper—John Ruskin

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The facts are:

Most won’t be able to afford life insurance as we get

older, when we are more likely to need it.

You will cancel your life insurance policy before you

want because for most people it becomes unaffordable.

Today’s lifestyle means that as we reach older ages

most still have the need for life insurance.

There are no savings or long term loyalty benefit with

term life insurance cover today.

It is cheap to start with when you are young but from 40

years of age the premiums take a hike upwards.

The right question

Life insurance forms a critical part of our personal, business and family protection

plans and many New Zealanders have some form of life insurance in place for

this reason.

The first question that anyone buying life insurance should be asked is how long

they would like to keep the cover for. Instead they are often asked how much

cover they would like or perceive they need. This places much of the focus on the

here and now with some potentially disastrous outcomes further down the track.

Our motto at Compass „pointing you in the right direction‟ presumes that you, the

client, are clever enough to make your own decision as to where you want to go.

You just need to be provided with the right information on how to get there.

But what happens if you don‟t get all the facts? What happens when you expect

one outcome but find yourself faced with something entirely different?

Read on and find out all you need to know about this most disturbing

issue…

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A quick history lesson

Thirty years ago the life insurance industry in New Zealand looked very different.

When you purchased a life insurance policy it meant you could keep it for life or

the term of the contract. They were either Whole of Life or Endowment policies.

These polices are not readily available today and didn‟t always provide the best

return on your investment. For example when the market is down your savings

could go backwards.

Today there are better ways of saving your money and getting a return,

including KiwiSaver, repaying debt etc. Insurance is not the best vehicle in which

to save money, which is why most companies stopped offering these policies.

It wasn‟t until 1981 that the first renewable term life contracts were introduced

into New Zealand and this is the common life policy sold today.

Renewable term or stepped premium policies had as an advantage that people

were now able to purchase more cover as the initial premiums were often much

lower. As the person gets older these premiums typically

increase each year.

There is a general trend showing that people getting into

their 50‟s and 60‟s are no longer able to afford these

stepped life insurance premiums. Often they need to

reduce or even cancel their cover at a time when they

are at a much greater risk of becoming terminally ill or

dying.

Today‟s lifestyle means that for many reaching these age

groups it does not necessarily mean a reduced need for

life insurance, let alone no need for any life insurance at

all!

True value depends entirely on what you compare it with.—Bob Wells

A 35 years old female with $250,000 life insurance will

pay about $15 per month for this. When she is 65 the

premiums will $222 per month and $1500 per month at

age 80.

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The current position for Kiwis

The main life insurance sold today in New Zealand is

Term or Temporary Life. When you stop paying the

premiums it has no future value or benefit, hence is

temporary. Most people will cancel these policies

before they claim on them as they are unaffordable for most people as they get

older.

However, as the generation that owned Whole of Life policies pass away, the next

generation is facing retirement with few insurance options available.

Everyone has been told for years that you don‟t need life insurance when the kids

have left home or the mortgage has been paid off etc. This may be true if one has

reasonable retirement savings, but for most it is proving to be a difficult time.

Consider these scenarios:

John and Jane are in their mid 50‟s, the kids have left home, the mortgage is small

and reducing. Because the premiums are becoming so expensive now they

rationalise that not many people can afford insurance at their age and because of

their circumstances they probably don‟t need it either. They cancel their life

insurance.

Then 2 years later John developed colon cancer. After 12 months of surgery and

treatment he is told that he has less than 12 months to live. This news is

devastating and occurs over 8,000 times each year in NZ.

Almost 2 years after John was first diagnosed with cancer, a period in which he

was unable to work, he passes away. Jane had to dramatically reduce her own

working hours to assist John through his treatments and surgery. Between them

they had earned almost $100k per year, whereas this had been reduced to $42K

during the last 2 years, even with the sickness benefit. Immediate family were

able to help with $20k and the bank would only lend another $50k on the house as

it was down to Jane to service it, so they decided to put the house on the market.

3 weeks before John passed away they moved from their family home for the last

17 years to a rental townhouse. We all know that no amount of money, insurance

or otherwise could make this tragic situation go away. But it does give us choice

and options. John and Jane‟s life insurance policies would have paid out when John

had been told he had less than 12 months to live. If only there had been some

way they could have kept some of their cover in place. Even just $100k would

have been invaluable. They could have kept some, if they only knew how!

On a personal note:

My mum was 69 and dad was 71. Dad had been hospitalised for the last few

months and passed away very quickly one night within 12 hours of getting

pneumonia. Obviously a difficult time for our family. The funeral director met with

TEMPORARY

9

us the following morning and told us we didn‟t need to worry about the funeral

expenses as they would be able to invoice Tower directly. That‟s right, dad had a

Whole of Life insurance policy.

Within a short space of time mum got the benefit from dad‟s policy, meaning the

savings she now has can supplement the superannuation she receives and she can

maintain the lifestyle she had.

Dad had always taught us kids the importance of insurance and since a bout of

cancer in his 40‟s he had jealously protected the cover he had in place.

Did you realise that if one partner dies and you are on the pension and you go

from a married to single rate, the difference is currently $9,410.44/annum (gross)

that you will lose? Just to maintain your current lifestyle, you would possibly want

at least $100k insurance to cover at least 10-15 years differential.

Obviously whole of life insurance is hugely expensive today and doesn‟t represent

good value, however there are many affordable long-term options still available.

Idealism increases in direct proportion to one's distance from the problem.

—John Galsworthy

Relative size of premiums compared to benefit:

Stepped Premiums

From age 35-80

$250,000

Life Insurance Benefit

Level Premiums

From age 35-80

No, this is not another optical illusion.

Level premiums are really this small by comparison.

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Stepped Premiums

Most people know how stepped premiums work because we complain about our

insurance premiums increasing each year as we get older.

The industry has taken advantage of a Kiwi trait!

Typically, Kiwis have not been the best savers and the financial institutions have

pandered to that trait which has penalised even the most discerning customer.

When you are young the risk of dying is low and premiums are cheap as chips, so

you are able to have $100,000‟s of cover for less than $30/month. However, when

you creep up over 40 years old and realise you are not 8 foot tall and bullet proof

and need this insurance stuff more than you originally appreciated, it insidiously

increases at an exponential rate.

We struggle to think of any other product where the consumer is treated as such a

mindless ignorant peasant and is expected to simply pay the increasing premiums.

It would appear as though we are not meant to have a decent amount of life

insurance as we get older. People often start to cut back and when they eventually

cancel are left with no meaningful amount of cover at all.

Unfortunately, most people are not fully advised of their options by banks, brokers

and insurance companies. You do not need to put up with age related

increases or cancel and be left with no cover at all!

Level Premiums

Level premiums mean that you can elect to pay more premium today when

premiums are affordable and not face increases in the future. There are many

different options when looking at level premiums ranging from 5 or 10 year level,

level to age 65 and right up to age 80, 90 and 100. There are even options

available whereby you can insure with no age expiry or get all your premiums

back.

The chances of claiming on your life insurance today are not as high as they will be

in 10 years time. Unless you take the right steps today, it is unlikely that you will

be able to afford cover when you are more likely to need it. It is important that the

protection you take today continues to work for you in the future.

You have the option of being offered CPI (Consumer Price Index) increases. This

ensures that the cover you take today has the same equivalent value many years

from now.

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Overall life expectancy has increased in recent years particularly with the aid of

medical advances. This means that the need to keep life insurance in place for a

longer period has similarly increased. People are also working longer and are

carrying more debt than ever before, further driving the need for affordable longer

term insurance cover.

Have you ever looked at property prices and exchange rates before a major shift

in the market and wished you could go back in time to take advantage of that

change? Well the good news is we can accurately forecast your insurance premium

rates and guarantee the minimum amount they will increase by because of your

age. We can also show you premiums that are guaranteed not to increase with age

and provide the accurate comparison to see its value.

You don‟t have to be in a position 10-15 years down the track wishing you had

made the right decision. We can accurately show you how to avoid the pitfalls

today. Don‟t feel bad if you are not on the right track at the moment as over 97%

of policyholders are unaware of the better premium options and have only been

shown the tip of the iceberg.

The best of both worlds

That‟s right, you can structure a plan where you

can have a policy which combines the cheaper

cover of stepped premiums and the long-term

affordability of level premiums combined in the

policy. You don't have to make big changes to

accommodate benefit from level premiums.

12

“I shop around for life insurance rates so I must be getting

the best deal, right?”

Whereas shopping around for most consumer items makes sense, it

presumes the items you are comparing are of equal value. It would be

unreasonable to compare different size televisions solely on price, for

example.

Life insurance is no different in that there are very clear differences between

policies. The cheapest policy today may turn out to be the most expensive

over the longer term. Insurance companies are not above discounting the

rate for the first year or two to win your business, only to increase it later.

DO NOT be fooled by „cheap-looking‟ quotes!

“I have been with my insurer for a long time. If I switch won’t I

lose all that I have paid up so far?”

A common misunderstanding about life insurance is that you are building up

value. The fact is that most people have term life policies which are no

different to house, contents or car insurance; you simply pay for a month

and receive cover for that month.

You will lose nothing by switching your cover to a better longer term

solution with regard to the premiums you have paid. Rather, if you stick

with a cover that will become unaffordable then you stand to lose a lot more

than just your premiums!

“I will keep my life insurance until I die!”

Sadly, this is one of the most common myths we come across day in day

out.

Modern term life insurance policies will become way too expensive even

before you retire, so there can be little hope of retaining this cover

anywhere near your dying day.

The fact is that the majority of people will have cancelled their life insurance

policy due to concerns about cost well before they die and so they will lose

not only their premiums, but have no cover when it is actually needed.

13

“Life insurance is only relevant if I have debts or dependants.”

Although having a mortgage or children (or even a business partner) can be

great motivating factors in people purchasing life insurance it would be far

from the truth to suggest that these are the only people who are in need of

cover.

All decent life insurance policies will pay out on what is known as a „terminal

illness‟. This can typically include such conditions as cancer and means the

policy will pay out in full if the person is deemed to have 12 months or less

to live.

There is plenty of medical information and statistics out there to suggest

that this could include any of us at any time and makes for a sobering

reminder as to the immense value a life insurance policy can bring, provided

that you can afford to keep it going long enough to claim! (see scenario on

page 8)

“I have existing health conditions therefore I can’t switch cover!”

There are many people who have had a change of health since taking out their

life insurance policy, and they can feel like they no longer have the freedom of

choice.

Often people are able to consider level premium options within the very company

that they are currently with, although it is unlikely that this has been explained to

them before.

For those who don’t currently have cover and may have been turned down in the

past we have another exciting option available. This is a policy that guarantees

up to $50,000 of level premium life insurance without the need for medical

information, at very affordable rates.

With all the options available today we can get cover for those who may have

formerly been considered uninsurable and at affordable rates that won’t increase

with age. Discuss this with us.

14

If you are one of the many New Zealanders who currently hold a stepped

life insurance policy then your premiums will become much more

expensive as time goes by. When you really need it there is a good

chance you will no longer have it in place.

Cancelling your cover will not only mean a loss of every premium that

you have paid but, crucially, that you will not have any cover moving

forward.

If you have life insurance and you know that you want to keep it long

term then there is only one choice open to you which is to incorporate

some level premium into your policy as soon as possible.

The younger you are the better the level rate that will be available to

you. The great news is that it is never too late and the older you are the

less time it takes for a level premium policy to save you money.

The most important message here is that everyone who has a stepped

life insurance policy is affected. This is why most life insurance policies

will never pay. They won‟t pay because they will have been cancelled

before there is a chance of a claim.

If a female aged 35 has $100,000 life insurance to

age 80, the accumulated premiums would be

$73,500.

If she had taken level premiums at $16 per month,

she would only pay $9000. A saving of over

$64,000!

Perception is strong and sight weak. In strategy it is important to see distant things

as if they were close and to take a distanced view of close things.—Miyamoto

How does this affect me?

15

Level

Premiums

Notice how when we view Stepped premiums compared to level premiums looking

from the higher age perspective it is easier to appreciate the true value of level

premiums. You don‟t really notice that at age 35 you needed to pay more.

Stepped

Premiums

When people compare stepped and level premiums

we only see where we are today here.

If these premiums were pills, which one would you rather swallow?

If you were 35 and had

your insurance just to

age 65 this is the profile

o f your premium

increases.

35 years old

65 years old

Stepped Premiums

A difficult pill to swallow?

65

5

5

4

5

35

Level

Prem

ium

s

16

Why have I not heard about this before?

By now you will have gained a little understanding as to what level

premiums are and how they work.

What you may be wondering is why this all seems like news to you.

Firstly, you are far from unique. Over 97% of all Kiwis have not come

across the concept of level premiums before. That is incredible!

We think the reasons for this can be broadly divided into three main

areas:

Clients

It is natural and prudent that we should check out the market to see if

we are getting a good price on an item. If you are buying a particular

model ipod for example, there will be always be a slight variance on

price amongst retailers and you are in a good position to judge which

is the best value for you (returns policy, extended warranty etc.)

However, as discussed in “Myth one” (page 12), when we start talking

about life insurance this is not comparing

apples with apples. Most believe they

have chosen good value premiums while

in fact are getting cover many times

more expensive than better options

available.

Do not be mislead. If you contact most brokers, banks or shop online

and ask for their best price then by default you are going to be

provided with stepped quotes that will always be cheaper initially.

So our natural desire to pay less, and a market unable to compete on

quality rather than price, means most will pay more and be unable to

afford insurance when they are more likely to need it.

Brokers

Traditionally most insurance brokers were more akin to salesmen (and

women, of course!) and as such had an incentive to try and „sell‟ you

whatever they could. One of the common denominators of sales of any

kind is price and so the psychology of sales would suggest that selling

you a lower priced item is easier than a higher priced item. As far as

life insurance is concerned that means selling you a stepped policy

17

over a better-value level type policy.

In more recent times it has become more fashionable for insurance

advisers to make recommendations based on your „need‟ for cover. As

a result of this, the average sums insured have increased dramatically

and it follows that for most people having level premiums would simply

be too expensive.

We feel that it is very dangerous to presume that all clients would be

happy to cover every conceivable need for life insurance today and yet

not point out the true longer term cost of

this protection. For most clients, a

compromise of some stepped and some

level cover is the much more appropriate

course of action.

There is little point

in driving a Rolls Royce today if you won‟t be

able to afford even an old Lada in a few years

time!

Insurance companies & banks

Well one problem here is demand. If Clients don‟t know what to ask for

and brokers and banks don‟t know how to educate clients on

purchasing value long-term then the demand isn't high. With less than

2.5% of the market currently enjoying level premiums very little effort

has gone into addressing the problem.

However, things are changing and we have been in discussions with a

number of companies on improving their communications and sales

tools for advisors and the general public. We have even sold our

proprietary tools and software to them to help with this.

Another key issue is that some insurance providers, including banks,

don‟t have level premium options for their clients. Furthermore, the

benefits of something a company does not have is unlikely to be

communicated to its clients. Similar to a restaurant not telling you

about the two-for-one special from a competitor just down the road.

If your life insurance company, bank or broker has not shown you the

advantages of level premiums let us show you the many options you

have.

18

HOW LONG DO I WANT TO KEEP MY INSURANCE FOR?

HOW MUCH AM I CURRENTLY PAYING?

DO I KNOW WHAT TYPE OF POLICY I HAVE?

DO I KNOW HOW MUCH MY PREMIUMS WILL INCREASE?

AM I ONE OF THE 97.5% THAT DON’T HAVE LONG-TERM COVER?

NOT SURE? - CALL 0800 COMPASS TODAY!

Checklist:

Printed: 8/09/2010

19

So what makes us the

experts?

The industry did! For years now we have

advocated the long term benefits of

premiums that don‟t increase with age.

Most advisors haven‟t had the tools or

inclination to raise this contentious matter

with clients who have been sold the cheapest

option for so long. How do they now tell you

that you should have done this sooner?

Compass has developed tools and software to

help you appreciate the risk of not being fully

informed and the value of protection when

you most need it. We are so passionate about

everyone being fully informed about this that

we have presented this to insurance advisors

at seminars around the country, sponsored

by New Zealand‟s leading insurance

companies.

Our intellectual property and software has

been purchased by the industry for

distribution nationally and we are consulted

regularly when companies wish to raise

industry awareness for affordable long term

cover.

We don‟t tell you what you should have and

then provide pages of meaningless reports

comparing companies and premiums. We

prefer to spend this time educating you to

make decisions for yourself and what

represents the best value and fits your

budget, not just today but for the future. Not

many people are buying insurance just for

the next year, so why should you only be

given this years‟ premiums to compare? This

has never made sense.

Being informed now, we hope you have the

information to discuss this important issue

with your bank, broker or insurance

company.

If you believe you have been given the

wrong advise in the past and don‟t have

the confidence in their advice moving

forward, you now have the tools to ask

the right questions when considering

your long-term options.

Remember, don‟t cancel your existing

cover until you have sought advice. In

many instances you don‟t need to

change the company you are with, you

just needed to have been given the right

advice in the first instance. Most

companies will have the right option for

you.

If you do require further assistance or

help in getting the right advice feel free

to drop us a line or to email us.

At Compass our philosophy is to point

you in the right direction and if you want

our help along the way, even better!

We hope you have found our booklet to

be informative and enjoyable reading.

Feel free to request a copy for a friend.

Pointing you in the right direction

L I F E L I M I T E D

©Compass Life 2010

Wellington

Level 1, Robert Harris Building

215 High Street, Lower Hutt 5040

PO Box 30580

Lower Hutt 5040

P 04 586 7837

www.compasslife.co.nz E enquire@compasslife.co.nz

0800 COMPASS

We don‟t expect you to be happy after reading this

booklet, many are absolutely gutted that they were

never given the truth when they were younger.

It doesn‟t matter which company you have your

insurance with, be it AMP, AXA, AIG, Asteron, Tower, ING,

Sovereign etc. Most Kiwis are unaware of the fact that

the life insurance sold in New Zealand since the early

80‟s will probably never pay out.

Find out why very few have been given the right advice

that would save them $1000‟s and give them cover that

is most likely to pay out and more importantly provide

cover when you need it most.

Learn how it isn‟t too late to benefit and save by some

simple steps you can take now!

L I F E L I M I T E D