Each week we ask a question to help you focus on an area of your finances that might need a closer look. This week: Do I really need insurance?
Ah, the old insurance dilemma has found us at last.
Over many weeks, we’ve kicked things off, found our focus, changed our habits, made a few resolutions, found love, sorted our budget, created a five-year plan, checked on our super, bought our first home, checked on the kids, ditched the debt and stopped spending our hard earned cash on stuff we don’t need.
This week we’re going to insure the lot of it.
Or are we?
Let’s answer the ‘do I really need insurance?’ question once and for all.
The future isn’t as predictable as we think
I hate to start out so bleak, but the fact is that at least 80 per cent of us have an inbuilt optimism bias that causes us to don the rosy glasses. Each of us thinks we’re luckier than we really are.
Added to that is our complete inability to correctly imagine the future. In his book Stumbling on Happiness, Harvard professor Dan Gilbert outlines three shortcomings we humans have in our ability to imagine the future – whether it’s a positive or negative one.
- Realism: our imagination so quietly and efficiently projects the future that aren’t sceptical enough about what it’s producing.
- Presenteeism: we tend to believe that the future will look pretty much the same as the present. We get trapped in our current time, place and circumstance and our mind finds it difficult to transcend those boundaries.
- Rationalisation: we tend to rationalise away either positive or negative thoughts, assuming that things will be “better in the morning”.
In short, we are ill-equipped to prepare for the future and will therefore likely make the same mistakes again and again.
“We marry people who are oddly like the people we divorced,” writes Gilbert. “We attend annual family gatherings and make an annual vow never to return, and we carefully time our monthly expenditures to ensure we will once again be flat broke on all the days that begin with a three.”
However, life’s ups and downs don’t last long
Knowing how uncertain the future actually is is enough to make you want to leap right onto getting health, home, contents, life, income, car and disability insurance, right?
Hold on a moment.
In all his research into happiness, Gilbert has also discovered an important trend: experiences impact us for a much shorter period than you would expect.
“The vast majority of people who experience any kind of tragedy or trauma will ultimately return to their baseline or very close to their baseline in what seems like relatively short order,” he explained during an interview with TED Radio.
It turns out we are a remarkably resilient species who recover from some pretty massive life events very quickly.
Which is not to say that if your house burned down and you had no insurance and had to start again from scratch with only the $50 you have in your savings account which is currently earning 0.1 per cent… you would be fine.
You would probably not be fine.
But then, insurance fills the gaps
Which is all to say that while we would most likely be okay in the long term, in the short term, when a major life event happens that financially ruins us, we’ll be very glad we had insurance.
While we might be hugely optimistic that nothing bad is going to happen to us, our imagination is not reliable.
And while we’d most likely recover and get on with things if something bad did happen, it would still be better to have the means to not have to start at the very beginning again.
Therefore, I’m voting yes: you really need insurance.
Insurance is a good idea
As we’ve established above, you don’t know if a crisis is in your future. You just don’t. So assume one is because chances are something is coming your way and you’ll want to be prepared for it.
Sure, you could invest the money you would usually spend on premiums into your own ‘insurance’ account. But bear in mind that you don’t know when your crisis is going to happen, or how much it’s going to cost you. Tomorrow could be the day you accidentally drive your car into the side of your house, and need to pay for two years of intensive medical attention and ongoing disability care for life. Plus a new car and home rebuild, of course.
It’s an exaggerated example… but is it? Who knows who, what or when is going to happen. You can look at all the probability statistics and algorithm your way to a number, but that’s all speculation.
The only way to be truly sure you’re covered for life’s mountains and craters is to take out insurance.
Benefits of insurance
Good ol’ ‘peace of mind’: especially if you have dependents. But even if you don’t, insuring your assets (including yourself) means you won’t be starting all over again if something happens.
Costs are covered: in the event of a crisis, it’s good to know that your income will keep coming and you’ll be able to pay any medical or travel bills. Don’t underestimate how enormous those bills can be, either.
Types of insurance
Life insurance is often taken out via your superannuation (but you may want to check whether that’s the best option for you). There are different life insurance products, protecting you for various life events. Moneysmart defines them as:
- Life cover — pays a lump sum when you die
- Total and permanent disability (TPD) insurance — pays a lump sum to help with rehabilitation and living costs
- Trauma insurance — covers you if you’re diagnosed with a major illness
- Income protection insurance — pays some of your income if you can’t work due to illness or injury
It’s basically a financial safety net for either yourself (TPD, trauma and income protection), or the people you leave behind when you die (life cover).
Basically, life insurance is the heavy hitter when people talk about the ‘peace of mind’ that insurance can bring.
Australia has Medicare, so why would you need to spend money on private health cover? Well, there’s a variety of reasons that it makes sense, and they can all be found here: Private health insurance: why you need it and how to get the best value
CTP (compulsory third party insurance) is mandatory in all states of Australia to register a car. It pays the bills if you injure or kill someone else in an accident in your vehicle. Effectively, you’re indemnified against claims for the damage and losses that were caused by the accident. Note that CTP doesn’t cover you for third party property damages, only damages to people – driver, passengers, pedestrians, cyclists or motocyclists.
Other ‘comprehensive’ car insurance is not compulsory, but is advised. You can take out third party property damage insurance to cover yourself if you damage another vehicle. That means you won’t be up for that brand new Porsche Cayenne you hit with your 15-year-old Kia Carnival.
In a nutshell, a home insurance policy will transfer risk from yourself to the insurer in the event of any damage, theft or accident.
Hit up the comparison websites to find the best policy for your needs. A few in the home and contents space are iSelect, Compare the Market and Canstar. CHOICE also offer a home and contents comparison and unlike other comparison sites, they don’t get paid by any of the insurers they are comparing.
It’s your biggest asset and it deserves protecting. You can find out more about how that works here: The best ways to protect your property
You can play around with numbers here. You might not need to insure for everything you currently own. Just for life’s necessities. You can find more on this here: 5 steps to reduce your home and contents insurance premiums
You can usually save money when you take out your home and contents insurance with the same issuer. Though not always.
Income protection insurance
Income protection insurance pays up to 85 per cent of your income if you can’t work due to partial or total disability. It’s viewed as a tax deductible expense by the ATO, so your premiums may cost you less than you think. Find out more about it here.
None of us are doing much travel lately, but when things start up again it’s an excellent idea to take it out. In the age of COVID, it pays to be prepared for the worst-case scenario.
If you think medical bills cost a lot in Australia, try breaking your leg in the US. Or losing your passport in Bolivia. Or even trying to visit countries like the UAE, Cuba, Turkey, the Czech Republic or any of the European Union countries – all of them require you to have travel insurance to get a visa.
Find out about the types of travel insurance and where you can buy it here.
Shop around and review regularly
Q: Do I really need insurance?
Which insurance premiums you’ll choose to pay is entirely up to you and your circumstances. Run the numbers. Paying $300 a month for health insurance seems like a lot, until you want to have elective surgery that costs $47k.
Just remember to shop around to find the best cover and premium and review your insurance policies annually.
Comparison websites make it easy to compare policies. Here are a few to try:
Find the rest of our Money Focus series here.