What insurance do I need?
Key Points
- Insurance should be used to protect against those things that would cause significant financial stress
- As there is a cost to insurance, you need to weigh up the cost vs. the benefit of different types of insurance for your circumstances
- The other consideration is how much of each insurance do you purchase? Will you cover a total loss or do you have some emergency funds that mean you can go with a lower level of cover?
- Some risks can be managed using multiple types of insurance so be mindful of unnecessary duplication
Once you realise how many types of insurance there are it can become overwhelming it may be difficult to decide which types of insurance you should even be considering, let alone comparing the various products that are on offer. Also the choice to obtain insurance is a personal one and everyone has different attitudes towards risk.
Remember the role insurance plays in financial fitness is to build resilience for the future and to cope with the unexpected. If you consider if each type of insurance achieves that goal or not, it can help you to identify if it is relevant and worth the cost.
“Insure the things that will kill you financially and the things that you love” Scott Pape, The barefoot investor
Questions to ask yourself: [this could potentially be a flow chart as well]
- What is the risk that the insurance pays out on? Is it a risk that I have in my life? • What are the consequences of the risk? Could I cope if the risk eventuated?
- How likely is the risk?
- What are other back-up plans that could be put in place for the risk?
- What is the likely cost of the insurance? How does this compare to consequences of the risk?
- Some risks can be managed using multiple types of insurance?
Once you have an idea about they types of insurance you should consider you can start to look into each type of insurance in greater detail and follow our tips to get the best deal.
Let’s see how this could work in practice with a couple of examples:
Case Study 1
Lisa is 26 years old and has been working as a lawyer for two years after completing her qualifications. She is single and lives in two bedroom apartment that she rents with her friend Jane. Lisa only moved out of home when she started working and still has a lot of her belongings at her parent’s home. She and Jane furnished their apartment with things that they mostly bought secondhand from op shops. As Lisa only lives a short walk from work she doesn’t own a car. Later in the year Lisa has booked a month long trip to Africa to go on safari which is her reward to herself for getting (and keeping) her first professional job.
| Insurance Type |
Lisa’s considerations |
| Home building |
- I’m renting so it’s the landlord’s building and they should manage the risk. No need for this
|
| Home contents |
- The contents in the apartment has some value and could be damaged or stolen
- If it was damaged or stolen, we would have to replace things, but individual items are not worth much as a lot of our stuff is secondhand and neither Jane or I have any
- valuables in the apartment
- I’ve looked into quotes for this insurance and most policies have an excess of $500 or more. Most of our belongings are worth less than that
- The biggest risk is if there was a fire and all of our belongings got damaged however the chance of that happening is small as it is a modern apartment with fire alarms and sprinklers.
- Worst case I could just move back home
- I think I can live without this insurance and can save the amount I would pay in premiums instead as a contingency
|
| Landlord insurance |
- Not applicable to me as I am not a landlord
|
| Lenders Mortgage Insurance |
- Not applicable to me as I am renting
|
| Car insurance |
- Not applicable to me as I don’t have a car
|
| Travel insurance |
- The cost of my holiday is expensive and I would be devastated if something happened and I missed it
- I’m travelling by myself so if something goes wrong I don’t have anyone that can help
- Not all the places I’m travelling to have good healthcare and healthcare costs are not covered for tourists
- The quote for insurance was $350 however this is small relative to the $12,000 the trip will cost. I think it is worth it and will mean my parents will worry less also
|
| Health Insurance |
- There is a chance of an accident or illness that will require hospitalization
- However I live close to a good public hospital and I would be comfortable to receive medical care using the public system in an emergency
- I do not have any ongoing health issues nor regularly see health practitioners except the dentist
- My salary is currently less than $90,000 and as I’m younger than 30 I don’t have to worry yet about being charged higher premiums in the future
- The cost of insurance would be significantly more than the benefit I get from claiming dental costs so I’m prepared to go without and save the money instead
|
| Term Life |
- Not applicable as I don’t have any dependents or large debts and I won’t need any money when I’m dead
|
| Life / Total Permanent Disability |
- There is some small risk of permanent disability and if that happened, I would be unable to work and would need to be taken care of
- My parents could help to care for me now, but may not be able to when they are older and also I would not want to be a burden to them
- I don’t have enough savings to support myself if something happened
- This is insurance that I should consider, I just need to think about how much insurance I get vs the cost of this insurance
|
| Trauma |
- There is a risk of getting cancer or other conditions that this insurance covers however I’m still young and in good health
- If I get sick I may not be able to work and would want to ensure I could support myself as well as pay for medical bills
- Trauma does provide a lump sum in the event of getting an illness, however if I have income protection I will already have some protection in the event that I cannot work.
|
| Income Protection |
There is a risk that I have an accident or become ill and cannot work
- If this happened I would not be able to support myself financially and while my parents may be able to help me I don’t want to rely on that
- As I am young I have many years ahead of income that I would miss out on if something unexpected happened
- This cover is tax deductible which makes the premiums more affordable
- This is insurance that I should consider
|
Case Study 2
Richard (35 year old ) and Samantha (32 years old) have been married for 5 years and have a 2 year old son Harry. Richard works part time as a primary school teacher and Samantha works full time as a GP at the local medical clinic. They moved into their 3 bedroom house just before their son was born and though they had managed to save a good deposit they have a sizeable mortgage. Harry is in day care on the days when Richard is working and they own a new SUV which Richard uses to get to work and to take Harry to day care. The couple purchased a lot of new furniture when they moved into their home as they wanted to make it a comfortable place to bring up a family. Samantha also has a few pieces of expensive jewellery which she received as inheritance from her grand mother.
| Insurance Type |
Richard and Samantha’s considerations |
| Home building |
- This is the house we want to bring up our son
- We have a mortgage that is secured by our property so if anything happened to it we would be in trouble.
- We should have home building insurance
|
| Home contents |
- Our belongings and/or the fixtures and fittings in our home could be damaged or stolen
- We spent a lot on our furniture and Samantha also has some jewelry that she treasures
- If something happened to these things we would not be able to afford to replace them
- We should have home contents insurance
|
| Landlord insurance |
- Not applicable to us as we are not a landlord
|
| Lenders Mortgage Insurance |
- We were able to save up enough of a deposit so we didn’t need this
|
| Car insurance |
- Our car is new and we need it to get to work and transport Harry
- As we drive around quite a bit there is the risk of and accident and there are a lot of expensive cars in our neighborhood that would be expensive to repair if we hit one
- As our car is new and we couldn’t afford to replace it if it was involved in an accident we are considering comprehensive car insurance
|
| Travel insurance |
- We are not planning any holidays in the next 12 months so this is not applicable
|
| Health Insurance |
- There is a chance of an accident or illness that will require hospitalization for us or Harry
- Our combined income is over $180,000 so we are paying the Medicare Levy Surcharge
- The health of our family is the most important thing so we are considering Health Insurance and Extras cover
|
| Term Life |
|
| Life / Total Permanent Disability |
- Both of us work and contribute to fund our lifestyle, if either of us were to die suddenly or be permanently disabled it would have a significant negative impact. Both of us still have many years of work ahead
- We also have a mortgage that would be a challenge to manage on a single/no income
- Our son Harry is very young and we would want to ensure that he is support if something happened to either or both of us
- This insurance is very relevant for both of us
|
| Trauma |
- There is a risk that either or both of us get a condition like cancer. If this were to happen we may not be able to work and there would be medical bills to consider.
- The impact would be larger if Samantha was ill given she works part time and has a higher salary.
- We would strongly consider this for Samantha and would need to weigh up the cost for Richard. Potentially income protection may be enough.
|
| Income Protection |
- Both of us work and contribute to fund our lifestyle, if either of us were unable to work for some time it would have a significant negative impact
- We also have a mortgage that would be a challenge to manage on a single/no income
- Our son Harry is very young and we would want to ensure that he is support if something happened to either or both of us
- Income protection is tax deductable
- This insurance is very relevant for both of us
|
