Mother left heartbroken after plan to use life insurance as inheritance fails

123rfLife insurance policies are rarely worth it for older people with grown children, says financial advisor Hayden Fitzgerald.

Karen Fletcher, 61, wanted her Manawatū family to have something when she died.. When her own mother was killed in a car crash there had been nothing.

So she took out a life insurance policy in 2009, when she was 40, that would pay out $169,000 to her three sons after her death.

Fletcher didn’t realise until recently that the policy was not designed as an inheritance savings plan, but to cover a family’s short-term needs after an unexpected death.

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The closer to the average life expectancy she has got, the more astronomical the premiums have become.

Fletcher, who now lives in Taranaki, said she wanted to warn others who have made the same mistake, because it was upsetting to think of others going through the ordeal.

Her premiums rose from $86 a month to $134, and were forecast to hit $468 a month by the time she was 70. She had now cancelled the policy.

“Now I’ve paid thousands in premiums, and my sons will still get nothing… I’m heartbroken.”

Fitzgerald Financial Limited financial advisor Hayden Fitzgerald, who specialises in insurance, said it wasn’t uncommon for people to have similar misconceptions.

He said standard life insurance policies paid a lump sum and were rarely worth it for older people.

They were designed to cover short-term expenses after an unexpected death for people who had significant debts, such as mortgages, or were still financially supporting family.

“Whole of life” or endowment policies would do what Fletcher intended, and were common in the 1970s and 1980s.

However, they were so high-risk they no longer existed, and the last handful of companies that offered them stopped doing so 10 years ago.

Data gathered by the Reserve Bank and Financial Markets Authority revealed the worst-value personal insurance sold by banks and insurers. First published in 2020.

He said older people often remembered such policies and thought that was how life insurance worked.

“People need to make sure they are buying the right policies for what they need.

“And because circumstances change, they should regularly review their policies to make sure they still make sense for them.”

Fletcher said she told the AA Life customer service representative what her goal was when she asked for the policy, and felt scammed when cost became “exorbitant”. However, the terms of the insurance had been explained to her.

Personal Investment Centre financial advisor Stephen Redwood said people hoping to leave an inheritance for their family should consult a financial planner.

Everyone had different circumstances, resources and tolerances for risk and an expert could help develop a savings plan with the best mix of methods and tools for any particular individual.

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