Insurance, it’s about protecting you and your family from life’s unexpected slaps in the face. I can’t stress enough the importance of getting the right level of cover as certain events can completely derail your financial goals. When we think of our insurance needs, it inevitably leads to the questions, what would happen to my financial situation if INSERT TERRIBLE LIFE CHANGING EVENT happened? How badly would paying out of our own pocket hurt us financially?
Insurance companies act as a mechanism for people to spread their own risk around a large user base. Premiums are priced such that the insurance company has enough money to pay out the claims that are triggered and, after that, can keep some for themselves. Now this leads to the objective of an insurance company which is to collect as much premiums and pay out as little as possible. So you, as a customer, are always going to need to read the fine print very carefully.
You can get insured for pretty much anything these days, but here are some of my opinions on the more common types of insurance available
Home and contents
For us, as home owners, this one is a no-brainer. If our house burns down it’s going to cost several hundred thousand dollars to re-build it and re-furnish it, to pay for it ourselves would set us back years financially. What we try to do is shop around each year as we find that we can get a better deal signing up as new customers in order to beat the premium increase of staying with the same provider.
Comprehensive car insurance
Replacing our vehicle would not ruin us financially but it would set us back a few months in terms of investing. Having said that we’ve had to make a claim on this insurance a couple of times in the past, so it’s provided excellent value so far. We also find that with all of the bad drivers on the roads there is a high chance that we’ll need to make a claim in the future. The main ways that we save money on this type of insurance is by having 1 affordable car between both of us and by shopping around each year for the best deal.
Travel insurance
This one is another no brainer, we don’t leave the country without it. The cost of hospitals visits in foreign countries can be tremendous. Seeing that travel insurances comes free with many credit cards there’s really no excuse not to take advantage of this cover.
Income protection
Income protection covers us in the case where something happens to us that causes us to not be able to earn the income that we are covered for. Once the waiting period is over it’ll pay monthly as per the insured policy terms up to the age of 65. Both my wife and I use this to protect us in the case where one or both of us become ill or get injured and lose our earning capacity. It essentially safeguards our path to financial independence.
Trauma
Similar to income protection however it pays a lump sum on diagnosis of some pretty bad stuff like cancer. We use income protection in the place of trauma insurance because we have enough savings to last out the income protection 3 month waiting period even if both of us lost our jobs immediately. If we really needed we could liquidate our some of portfolio to help as well.
Total permanent disability (TPD)
For us this one is like trauma insurance, our income protection covers us here and it’s also easier to claim on.
Life insurance
Because we don’t have any kids or much in the way of debts if either of us die then the surviving party won’t really be burdened financially. As a result we also choose not to have this type of insurance.
Pet insurance
We used to have this, until we discovered that it didn’t cover anything that we needed and since vet bills aren’t ridiculously huge we opt to just pay for any vet bills out of our savings.
Private health
I’m lucky enough to have a heavily subsidised basic plan through the company I work for which ends up costing me far less than having to pay for the Medicare levy surcharge. So this one has the combined benefit of saving me money and giving me some private health benefits. Something to keep in mind is that the public health care system does cover almost everything you need so this can be more of a luxury than a necessity. This is especially true when you consider the cost of yearly increase, which for me, has far exceed inflation every year. You also need to carefully read the fine print as it’s very easy to think you’re covered for something that you need when in fact you’re not.
When you need to up your cover
From the previous paragraphs you can see that we choose to use our emergency fund to self-insure where possible. However we live in a relatively secure financial situation which allows us to do this, once we are financially independent this will be even more so and when that is the case it’s we’ll drop the income protection and seriously look at dropping private health. On the flip side, you’ll want to consider increasing your cover if you have dependents, have a low income and/or have large debts (including mortgages). Essentially all of these conditions increase financial risk and need to be controlled for.
Buying insurance through and advisor vs DIY
We use the services of the company my wife works at to help us find our income protection insurance, we found that the main benefit of this was that it took that hassle out of looking for the right cover as well as having to prepare all of the paper work ourselves. Going through an advisor can also help you when it comes to making a claim as they can act on your behalf and they are well versed at pushing for a better outcome.
The major disadvantage is that may try to up sell you more cover than you need so it pays to have a good understanding of your worst case scenarios that you’re trying to insure yourself, and your family for. It also pays to make use of the service that you’re paying for by asking questions and challenging their proposals.
On advisor fees
An insurance advisor will charge a fee on top of your premium for however long you have the policy for. Personally I have nothing against fees if the advisor is providing value year after year. So what this means is that they should be reviewing your situation around once a year to see if your cover is right for you. So you, as the buyer, need to make yourself accountable for getting them to do the work periodically and by asking plenty of questions to make sure you fully understand what you’re signing up for and why.
So there you have it, my take on some of the more common types of insurance available and some of my opinions on using an advisor to purchase insurance
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