The Perils of Life
I worked as an life and general insurance broker for my whole career. I got to see the industry from the middleman point of view, being an insurance salesman. In this article, I will provide my personal thoughts on what to insure, and how to insure it.
These are my personal thoughts only. They are not to be taken as insurance purchasing advice or recommendations, as every person’s situation is different.
Insurance Covers The Perils of Life
I buy insurance when I want to insure for events that may happen to me, but could not or do not want to pay for the loss financially.
The most important types of insurance to insure against, are catastrophic losses. These losses happen very infrequently, but would create financial hardships for most people, if no insurance was in place.
Mandated Auto Insurance
I own a car and drive that car. I have to pay for auto insurance that has be mandated by the government . In BC Canada, it is mandatory to purchase auto insurance through the Insurance Corporation of BC. ICBC is a government auto insurer in BC.
Auto liability, which is part of the policy, covers when I cause bodily injury from a car accident. Liability insurance in a nutshell, covers when someone blames you for causing bodily injury or property damage.
Auto insurance is more about fixing people’s bodies than fixing cars. The biggest claims are for liability coverage for yourself and others. Consider the lifetime cost of someone injured in a car accident, who now need care 24 hours a day.
Mandated Seats Belts
Years ago, the US government mandated that seat belts must be worn by everyone riding in a private automobile. The reason is simple, it minimizes bodily injury in an accident. Many countries have adopted this legislation, that requires everyone to wear seat belts.
Seat belts are a good risk management tool.
With a Mortgage, Mandated House Insurance .
A house is often a family’s biggest asset. Young families probably have a mortgage on it, and the mortgage company requires that you buy house insurance. If the house burns down, the mortgage company gets back their outstanding mortgage money, and the homeowner gets his equity.
I mention these mandated insurance situations, as it shows that governments and societies feel that everyone needs to be protected in certain situations.
High Deductibles are Good Value
No one expects to make a claim on their insurance. How many insurance claims you have made in the past ? Probably none or very few.
The concept of insurance is to have many people are putting insurance premiums into a pot, and the few that have claims, get to use that money to financially recover from the damage they have suffered.
Having a high deductible is good value, because it saves you premium dollars, and the insurance company knows that you are not a “claims seeking” person, who wants to make small claims, because you carry a higher deductible.
At car insurance or house insurance renewal time, ask your broker the premium savings if you raise the deductible. It could be a 5 to 10% saving.
If you have an accident and have to pay the higher deductible, it will not be catastrophic financially.
The Peril of Dying
Suppose you are an average young family man. You are married with two young children, a house, a car, a mortgage, and a lawn mower. You are the major bread winner for the family. If you are killed in a car accident, your family will have no more income.
You can replace your income with life insurance . Life insurance is the cheapest form of money at death.
You can go online to check life insurance rates. Rates will vary depending on the type of life insurance policy you buy.
For a $100,000 life insurance policy, rates can run from $200. per year to $2000 per year, depending on whether it is a term policy or a permanent policy.
Non-smokers get a discount compared to smokers, which makes sense.
It’s common for young families today, to have $500,000 or more of life insurance to cover their needs. This can be allocated to pay off the mortgage, and leave enough money to be paid out as monthly income for at least the child raising period.
The Peril of Becoming Disabled
Another peril that is often overlooked is that of disability. You may become disabled from falling off a ladder while cleaning your gutters. If you can’t work, income for the majority of people will stop.
Your income can be replaced with Disability Insurance. You may have this insurance through a group insurance policy with your employer. Depending on your occupation, this insurance can be expensive.
An office worker will pay less for disability insurance than a tradesman, because of the greater risk of the work that a tradesman does.
If you are self employed, you will have to purchase this coverage on your own, or obtain it through a group policy, like a trade association, or the Chamber of Commerce.
Health and Dental Benefits
If you have a group plan with your employer, it probably includes Extended Health and Dental Benefits.
This insurance will cover a number of health related issues with coverages for – prescription drugs, physio therapy, dental coverage and more. These benefits are nice to have, but for most people are not financially catastrophic in nature.
If you are self employed today, ask yourself if you need to purchase health and dental benefits.
I was self employed in my career and decided not to purchase health and dental benefits. My thought was that if I paid for dental expenses out of pocket, that will probably be less expensive than the premiums for the insurance. And for our family, I was correct.
In Canada, self employed people and small businesses can use a program called a PHSP or Private Health Services Plan. I had this plan for a few years.
The PHSP is more of a trust account for health expenses, than an insurance policy. This allows a self employed person, to deduct the money he puts into the PHSP trust account, as a business expense. The funds are held there with few charges, until claims like dental are made, and then the bill is paid from the account.
Talk to a broker who offers PHSP’s for more information.
What Will You Self Insure ?
Life is full of risks. You should buy insurance to cover some risk. But you can’t, nor should you, buy insurance to cover every risk. We all need to self insure some things in our life.
Insurance With Less Value
The insurance industry has been creative in creating new insurance products that cover things that are not usually in the catastrophic category.
When asked to purchase these products ask yourself, what are you willing to self insure. What am I willing to take a risk on ?
Some of these products are not even be sold by an insurance company.
Product Warranty Insurance at Retail Stores
Some of the electronic stores push their warranty products quite heavily when you purchase a new appliance. This warranty package is often a percentage of the purchase price, say 15%. So if you spend $500. on a stove, they want to sell you a 15% warranty package that will cost say $75, that will cover the appliance for a couple of years.
I do not purchase this type of insurance, as my thoughts are – if this brand new product needs a warranty package, then I should not be buying it.
Most appliance and electronic products have a manufacturers warranty that will cover defects for a year or more, and you don’t have to pay for it.
Credit Card Insurance
I have been getting phones calls the last few years, from my credit card companies offering me credit card insurance. I decline the coverage. There is little value to me, in having my credit card payment covered if I am disabled. The bigger question is having enough money for the major living expenses like food, a car payment and a mortgage payment.
Having a disability policy that will cover all your major living expenses is the way to go, as you can use that money to pay your credit card payment.
Another thought here, is not to have high credit card balances that will cause me financial concerns. I am better off, paying my credit cards fully every month, so I pay no interest on them. If I can’t do that, then –
Get a Credit Line
If I have to pay something off over the next year, then I use a credit line from my bank. The interest rate is far lower than the credit card company, and the credit line has great flexibility.
I have used a credit line for over thirty years, to pay for house repairs and business expenses, as needed. It is a cheap and flexible way to borrow money when needed.
The minimum payment on my credit line was 3% of the outstanding monthly value. So if I have $5000. borrowed on the credit line, the minimum payment would be ( 3% x $5000 ) $150 a month. At that payment schedule, the credit line will pay itself off, in about 3 years.
Be a Good Insurance Customer
When I apply for house insurance, the company wants to know my house insurance history. How many claims have I had in the last five years ? And they will check on that, with my previous insurance company.
Making claims is not a good thing, and can label me a bad risk to the insurance companies. A couple of claims get the insurance company’s attention, and depending on the type of claims, they may decide to decline to offer coverage to me next year.
Then when I go to a new insurance company, and they get my claims history, I may find that a second company will also decline me too, and I may not be able to buy insurance from any company. That is not a good position to be in.
Monthly Payment Plans
If I bounce a monthly payment on my house insurance more than once, some companies will take the monthly payment plan away. I then have to pay the annual premium for a few years, before they will let me back on the monthly payment plan.
What The Insurance Company Wants
Insurance companies want to make money, and most of the time they do. They want to collect the premiums and have few to no claims.
We all have an idea of the risk, but few of us have data that the insurance company has, to understand that risk.
You may think the risk is higher than it really is, and feel the insurance premium is a good deal.
Insurance companies have mountains of data on the risks they insure and have carefully calculated how much they will need to pay out.
After the claims calculation, they add on the administrative costs, and a good profit and that will be the total premium that the customer pays.
There are no insurance bargains.
Insurance companies have government regulations that require them to have done their home work, and have the required funds in reserve for potential claims. I would not want an insurance company to go broke, the day after I phoned in a claim.
Classes of Insurance
Years ago, I saw a chart on the various types of insurance – auto, life, disability, travel, etc, and what percentage of the premiums each class paid out in claims.
What I remember from that, was that Travel Accident Insurance, which we purchase from a machine in the airport, paid out the least percentage of the premiums. It was a very small percentage, I think it was something like 2% of the premiums. That is very profitable to the insurance company.
Clearly the customers who bought the policy, thought the risk was higher than it really was.
No One Has a Crystal Ball
No one has a crystal ball to know when and where we will need insurance.
We need some of it, but we want to get good value for the money we spend.
It is your duty to assess your insurance situation every year. You need to consider the perils you could buy insurance for, and the types of insurance options available for those perils.
Don’t be afraid to ask your broker a lot of questions. He is there to help you.