In life’s financial version of snakes and ladders, actions like saving, investing and earning more are the metaphorical ladders. They’ll help you get to financial independence faster.
But you also have to look out for those sneaky snakes.
Issues like disease, damage to your property and job loss will send you sliding back towards your starting point, or even beyond.
That’s right: the financial snakes and ladders board isn’t just 0 to 100. There’s negative territory below zero. You don’t want to live there.
One way we can stop these snakes sending us backwards is insurance.
The trick is to know which snakes to insure against, and how to do so effectively.
Like almost all financial options, there’s no one-size-fits-all answer to insurance. But there are some common principles you can apply:
Your default position is self-insurance
Stop thinking of yourself as ‘not insured’ for something. When you don’t pay for insurance elsewhere, you’re self-insured.
Bottom line: you’ll cover the cost when something goes wrong.
This is an excellent default position for low consequence or low-cost events. It’s also fine when there’s a safety net like Medicare covering some costs.
But if it’s something that has the potential to wipe you out financially and there’s a reasonable chance it could happen to you, you’re taking a risk by self-insuring.
So, what’s a ‘reasonable chance’? Good question. Before we tackle that one, please note:
Your perception of risk is flawed
…as is mine, by the way.
We humans are notorious for thinking we have control where we don’t. We perceive our risk of dying from smoking-related illness or ending up in a car crash as far lower than being killed by a shark or dying in a plane crash.
Driving and smoking are in our control, so we think they won’t happen to us.
Death by shark or plane crash are in the hands (or fins!) of the shark and those who maintain and operate our planes, so we think they’re more likely to happen.
The numbers will tell you the most dangerous thing you’ll do today is drive your car. It’s more dangerous than swimming in the ocean or catching a flight by a very, very long way.
Why is this important? Because we all think ‘It won’t happen to me.’ And then it does.
You don’t know what will happen
My mother was – by a long way – the healthiest of my children’s four biological grandparents. In terms of weight, diet and exercise, she did all the right things.
If I’d been taking bets, I would have put short odds on my dad passing before her. Yet here we are, five months since she passed. I am eternally grateful Dad’s alive, but I think we’re both shocked that Fran died first.
You don’t know what will happen, and you don’t know when.
A fire, flood or storm could destroy your home. A debilitating disease might strike, costing thousands in treatment and precluding you from work. Your employer might make you redundant – or just fire you.
So, it’s time to get real. What poses a risk that would ruin you financially?
What you insure against depends on you
There’s no complete list of mandatory insurances you must have. It depends on your circumstances.
For example, if you’re a student living at home with your parents, you probably don’t need much in the way of insurance.
Check with your folks to confirm, but you can stay on their private health insurance till you’re 24 (then on 1 April 2021, that will be extending to 31 years old). Your precious belongings may also be included in your folks’ contents insurance. The only insurance you may need is car insurance if you own a vehicle.
If you’re the sole wage earner in your family and that wage is paying a mortgage on your home, you can imagine catastrophe appearing in a few guises.
Or if you can’t work – say you get sick, or you’re fired – you’d last as long as your buffer fund before you’d have to find cash elsewhere to cover costs.
If the home is destroyed by a natural disaster, you’d be up for hundreds of thousands of dollars to rebuild, while also paying rent somewhere so you had a home AND the existing mortgage.
Both of those scenarios could not only wipe you out; they could bankrupt you and make your family homeless. Having insurance to alleviate those potential events could help you sleep well at night.
Common insurances to consider
I like to think of these in a few buckets, in priority order (in my opinion), as insuring your:
- body and mind,
- ability to earn, and
1. Insurance for your body and mind
Health is wealth. Lack of health definitely puts a dent in your hip pocket.
In order of catastrophic consequences, you could:
- Become permanently and totally disabled,
- Become permanently and partially disabled,
- Suffer a major health crisis from which you eventually recover,
- Suffer a minor health crisis from which you recover quickly.
In between these points, there’s a multitude of options.
When your body or mind is not working as it should, you may find you can’t work, or that you’re dependent on family and professional care. It could be for a short time, or for much longer.
If you are supporting others, anything that keeps you from earning an income means the earning burden passes to your dependents. Social security such as the National Disability Insurance Scheme fills the gap, but you can be assured it will impact those closest to you.
For this reason, it is common for adults with dependents to have:
- Total and permanent disability (TPD) and life (which really means death in this case) insurance.
- Private health insurance.
TPD and life insurance
…isn’t really for you. It’s for those who depend on you and are left behind when you die. It’s for the loved ones who have to care for you if you can’t look after yourself anymore. It ensures there’s some money to help ameliorate the loss of you.
It’s common to have your TPD and life insurance in your superannuation. This has the advantage of not coming out of your wages. It’s a good idea to check your premiums are competitive and your cover is high enough.
It’s also common to cancel your life insurance when you no longer have dependents at home (e.g. the kids are now supporting themselves). Your policy may also have age limits, for example TPD insurance often expires when you reach 65 years old. Check your policy to find out what you’ve got.
Private health insurance
…is for illnesses from which you may be able to recover, or chronic issues that require ongoing care, that aren’t covered by Medicare to your satisfaction.
It can include covering ambulance costs, hospital stays, maternity and the like. Each insurance policy is different, and it’s important that you know what you’re getting. Privatehealth.gov.au is an excellent agnostic way of comparing policies and pricing to ensure you’re getting what you need at the most effective cost.
Private health insurers also offer what’s commonly touted as ‘Extras’ cover. This is to help cover the cost of what some consider nice-to-have therapies. Like dental, optometry, massage and psychology.
Having Extras cover can be worth it if the amount you claim in a year outweighs the cost of the insurance, but it does require diligence to make sure you use up enough of your allowances to make it worth it. Personally, I’d rather cover such costs out of my buffer when I need them.
When you travel, you may also look at travel insurance that includes medical coverage. The cost of a Medivac flight home to Australia from almost any other country is around $150,000. You don’t want to be choosing between staying a hospital in Kathmandu where you have to warm up blood for transfusions yourself (true story) or coming home to known quantity that is Australia’s health care system.
2. Insurance for your ability to earn
Until you’re financially independent, wages are what keeps you housed, clothed and fed.
Anything that puts a dent in your ability to earn can be problematic for covering such basic costs.
The best insurance in the short term for small hiccups is a healthy cash buffer you can draw on in emergencies.
But when that ability to earn is affected for many months – or even years – you may find your cash and assets aren’t enough.
If you’re an employee, income protection insurance is the most straightforward way of protecting your cashflow coming in. It’s not a permanent fix and it’s not usually at your full rate of pay, but it’s intended to give you time and space to find another way to earn money.
If you’re a freelancer or business owner, your income still may need protecting, but in additional ways.
Depending on what you do – what products you sell or what services your offer – you may need public liability insurance, professional indemnity insurance, product liability insurance or business interruption insurance. Even cyber liability insurance is a thing these days.
Choosing what’s important will depend on your organisation’s risk tolerance.
Take Wimbledon. Since the SARS outbreak in 2002, they have been forked out $54.4 million in pandemic insurance (a rate of approximate $3.2 million a year).
In 2019, this looked like a crazy expense. Very few organisations were willing to wear it.
It sure paid off in 2020, though! They were paid out $226 million when COVID-19 struck.
(Before you go scurrying off to get pandemic insurance, please note that it’s now pretty much unattainable.)
For those who rely on rent from property to cover their living costs, landlords insurance can be useful to cover lost income from vacancy.
3. Insurance for your things
Houses. Cars. Jewellery.
These things can be costly to replace, if not irreplaceable (in the case of items like family heirlooms.)
Which is why insuring these valuables is popular, and often sensible.
You can consider:
- For cars, there is comprehensive car insurance with all its attendants such as fire damage, theft and accidents.
- Home and building insurance, or strata insurance if you’re an apartment owner, will cover partial or total replacement of a damaged building.
- If you’re renting a property out, landlords insurance will cover damage ‘from the paint in’.
- When it comes to valuable items like jewellery, cameras or laptop computers, contents insurance and/or personal items insurance usually suffices.
It’s not usually worth it for low-cost items. You’d want to balance out the cost of paying a policy for say, a few years, against just buying a new item if you break/lose the current one.
Making the most of your insurance
If you’re going to fork out some money to be insured, you may as well get the biggest bang you can for your buck.
Here’s some tips to make sure you’re getting the best deal you can:
Get your scope clear
There are no less than sixteen types of insurance listed above. Chances are you don’t need all of them (maybe not even half of them).
Have a definitive list of what you need, and how much it needs to cover. Check your existing insurance product disclosure statements (PDSs) to see what you’re covered for, and what exclusions apply.
Check – don’t assume – you’re getting the best deal you can
There’s a lazy tax trap here. If you just pay your insurance premium each year when it arrives, you’ll be paying more than someone who signs up for the same policy anew.
Just like banks and their interest rates, you have to ask for a discount.
Or, you can do what I have a few times – just apply for a new policy online each time and let the old one lapse. As long as there’s no penalty for being a new customer (e.g. a no-claim bonus relating to the length of time you’ve had the policy for) it can be less frustrating than calling the company.
Don’t forget to update your insurance if your circumstances change. I got an $18 reduction in my car insurance because of the impact of COVID-19 on my travel. It’s not much, but it can add up.
Check also that you don’t have duplicate insurance where it’s not helpful. For example, having multiple policies with different insurances can sometimes cause them to fight over who has to pay you out, whereas other types of insurance simply mean both insurers will pay you out. This is where consulting an insurance broker can help, but choose your broker carefully so they don’t sell you dud insurance.
(Before the insurance broking industry starts attacking that statement – we know from the Banking Royal Commission that some banks in particular have sold worthless insurance to vulnerable people. It happens.)
Consider a higher excess to get a lower premium
I was playing around with a quoting tool when I wanted to insure my mum’s car (which I have inherited).
Setting $0 excess meant a premium of $1,347 per year. Increasing the excess to $1,000 meant $731 per year.
That’s $616 difference. If I pay the lower premium for two years without a claim, I’m ahead if I have a bingle in year 3. That’s a risk I’m willing to take, as finding $1,000 for a car repair is feasible for me.
What is your excess? Can you ramp it up a bit so your premium drops?
Got a story to share about a great deal you’ve gotten on your insurance? Or a trap you’ve fallen into? Drop it in the comments, we love reading your stories 🙂