Are you overinsured? Ask yourself this one, simple question

As a species, we’re pretty good at surviving. Pat on the back for all of us!

As part of this, we’ve developed millennia of ingrained primal habits and conditions in an attempt to avoid all the hazards life throws at us.
Fortunately, it’s done us pretty well so far. Unfortunately, it’s not a system designed for the 21st century first world, where you’re never likely to run out of food but you might foreseeably prang your motor or lose your passport in a foreign land.

Nothing life threatening but it’s all the same response.

n.b. I’m not including the U.S. due to it’s differing views on healthcare. Your life might be at risk here, luckily there’s plenty of U.S. blogs you can search through for more info on this.

Our latest attempt at group safety, conjured by Lloyds of London just over 300 years ago, is insurance. On the whole it functioned quite well in the beginning.

The premise was, prior to insurance, if you sent out your ship (unfortunately at these times, it was usually involved in the slave trade) and this ship then was lost, you would lose your entire investment. This is a big risk to take.
However, if there’s 100 ships and the odds are that only 2 will be lost per journey, by spreading the risk amongst all the ship owners, with a margin on top for the insurer, no one would ever lose everything and the insurers made out too. What’s not to like?

I’d imagine this was quite a logical affair originally. Edward Lloyd opened his coffee house, shared all the recent shipping information with those with vested interests and saw an opening. But even he, the inventor of insurance as we know it, when it was in it’s infancy, saw that it could be bought as an emotional response.

Whenever news of a ships loss came into the establishment, he would ring a bell, reminding everyone in there that it could be their ship next, and if they don’t keep paying up for insurance, they could be out on the street and broke within no time. Whist the premise definitely made sense, this one simple act made every loss tangible and instilled fear into all that heard it.

Emotions are wonderful things for marketers, easily tugged at, and once you’re in a state of fear, you can be sold anything. It’s often subtle but you hear it played out in peoples everyday reasoning.
‘You must buy a large 4×4, otherwise if you have an accident, your children could die.’
‘You must have an expensive alarm system with 24 hour, pay by the month monitoring because there’s bad people around every corner that want to hurt your family – for reasons unspecified. ‘

You know the ones.

And the thing is, the human brain is notoriously bad at assessing risk. On this page, they use Thaler’s experiments on risk as an example

‘Peter Bernstein cites an experiment by Richard Thaler in which student were told to assume they had just won $30 and were offered a coin-flip upon which they would win or lose $9. Seventy percent of the students opted for the coin-flip. When other students were offered $30 for certain versus a coin-flip in which they got either $21 or $39 a much smaller proportion, 43%, opted for the coin-flip.’

So both scenarios were identical, simply framed differently. However when presented as a potential loss, the human brain runs away to it’s safe, known quantities as fast as possible. This is why it’s so easy for insurers to take us on a ride. We cannot handle loss.

All we need to do is remain rational and we can reap the rewards others run away from.

Right, so how do we remain rational, with respect to insurance?

You ask yourself one simple easy question.

‘If I didn’t have this insurance, would there be any chance, however remote, that I, or my loved ones, could be sent bankrupt as a result?’

When presented in this logical sense, no insurer can start whining at you to ‘Think of your children’ or ‘Do you have a plan in place if you did lose 2 legs an arm and an eye?’. You don’t need a degree in statistics or to become a qualified actuary and it works in 100% of situations I’ve come across.

This is the point of insurance, not to save you from ever having responsibility for your problems in life as some use it. As much as we’d all like to, none of us will ever get away from those.

So let’s run it as an experiment –

Car insurance

Do you go Uninsured, Third party, Third party fire & theft or Fully Comprehensive? I suspect most people go fully comprehensive but is it the best choice?

Now by asking the simple question above, we can work out that you more than likely won’t be made bankrupt by losing your car, whether through an accident, a fire or a theft. If it might send you bankrupt, perhaps you’ve bought too much car for your income and asset levels and need to revisit.

However, with no insurance if we were to have an accident, we could cause ourselves to lose millions in damage claims and court cases so clearly this isn’t the correct option either. Logically, the best and most efficient option is Third Party.

By doing this, you’ll save yourself in the region of $500 per year.

Home insurance

Here the options are uninsured, insured with a low excess, insured with a high excess.

Uninsured makes no sense in this option as the loss of a property will send the vast majority of us into bankruptcy pretty quickly.

So we need insurance, now lets look at the excesses. Low excesses of $500 or a high excess of $5000. Bear in mind, you’ll only be using this insurance in the event of a total loss or major damage and the insurance company don’t charge you $5000 to come assess, they simply take it off your payout.

Would it really make that much difference to you if you were only paid out $95k instead of $100k? You couldn’t find a way of saving that on the repair somewhere?

So if you can afford $5k to come off, it’s the high excess, if not, it’s the low excess.

You’ll save around another $500 a year going for the low excess.

Life insurance

Would your partner be comfortable, financially speaking, if you passed away tomorrow with no insurance? Or would they have to work 3 jobs, sell off the family home whilst raising 3 kids to stave off bankruptcy? More potential situations here but the same principle applies, could it send your loved ones bankrupt? If yes, get it – and just enough to be comfortable. If no, whats the point?

Guess how much you could save here? Yeah, about $500 per year.

Junk insurance

Mobile phone insurance, extended warranties, insurance for sending a parcel, personal accident cover (I used to sell it, it’s awful), all the extra insurances they tack on to your home and car insurance. By this point in the post, I’m hoping these should all sound like thoroughly unworthy candidates for your hard earned.

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You know what the best thing about keeping your insurance levels under control is? Not many opt for these levels of cover, other than misers and scrimpers like you and me, therefore they’re extremely competitively priced! They’re sold more with an eye to logic than emotion and are easily comparable against other companies policies.

That’s not to say you won’t lose sometimes. This year I’ve lost 2 windscreens, one through my own fault, loading in timber, one through a guy throwing a bottle at my car. It’s cost me $550 but it’s an aberration. Statistically, you only lose a windscreen every 12 years so hopefully, I’ve got 24 years left with no windscreen losses! Every year from now on, I’ll still be saving $500 per year.

Keep it out of the insurers pockets and send it to your superlife instead.

Published by

Andrew Palliser

I'm a small sized property investor and self managing landlord of medium term room lets, making a desperate scramble for early retirement.

8 thoughts on “Are you overinsured? Ask yourself this one, simple question”

  1. Thanks, mate. I am in the middle of sorting out my insurance. My way of thinking is can I handle that with my emergency fund (cover my car and junk) and Government support (health). For what I can cover (my cheap car) I only have 3rd party or liability insurance with high excess. I am thinking of ditching my health insurance as well.

    1. Yeah, i was unsure with health cover for a while.

      The straw that broke the camels back was when I was diagnosed with Crohns disease. They refused to cover me due to a tenuously related issue a year or so earlier.

      As much as I’ve always believed in the private sector’s ability to deliver, the public system was about as good as I could have asked for. Sure, I didn’t get a room of my own with a telly but it was fine.

  2. I like what this article says, especially putting insurance in its historical context. I also like that it promotes the idea that people need to be wary of over-insuring. This is a valuable message. People and organisations with a vested interest in insurance don’t generally have an incentive for advancing this message.

    I especially like the reference to psychological research from Thaler, Kahneman and Tversky relating to framing. Another relevant bias is the impact bias – our tendency to overestimate the length/intensity of a future feeling. If something bad happens, we are better at adapting to this reality than we might think. This is very relevant to insurance.

    I disagree with the central question’s focus on avoiding bankruptcy, however. Personally, I don’t think the point of insurance is necessarily avoiding bankruptcy or insolvency. I think of insurance as a tool to help people manage risks, especially catastrophic risks, according to their risk appetites and personal objectives.

    The question in this article is a valid question to ask. But it’s not the only legitimate question. I would say that the appropriate question is: “If an insured event occurred, how do I want me and my loved ones to be provided for?”

    I’m married with two young children. If I die early, I don’t want my children to lose their mum to grief AND financial hardship. I sleep easier knowing that if I die, my wife will have enough to support my children with a reasonable lifestyle. I’m not going to insure my life for the bare minimum for my wife to avoid bankruptcy. I’m comfortable paying higher premiums for this peace of mind.

    The same is true with other important forms of personal insurance which aren’t discussed in this article, such as income protection insurance, total and permanent disability insurance, and trauma/critical illness insurance.

    Don’t get me wrong – I don’t think people should over-insure. I think people should be aiming to self-insure to the greatest extent possible. As you build wealth and your dependents get older, your insurance needs should generally decrease.

    Although the question in this article may be appropriate for some people, in my view it’s a little too narrow. It’s also legitimate to want to provide more for your loved ones than the bare minimum. As with all financial decisions we make, we make trade-offs, and it’s valuable to make decisions that are in line with what we want and value in life.

    For some people, it’s appropriate to pay slightly higher premiums to provide more for their loved ones. At the end of the day, it’s a personal decision that relates to your circumstances, needs, objectives, and values.

    1. I understand your points and I’ll be looking up about impact bias.

      As a tool, working out how much of a loss your partner can sustain before severe financial hardship/bankruptcy and working from there is a solid, cold hard facts way of working out how much cover you need. If you feel you want more, you’re aware it’s not the base amount and thats fine.

      Some of us choose not to live off rice and beans, some of us choose to commute by car and some of us, heaven forbid, use a clothes dryer! The key thing is, we all choose what level of luxury we’re comfortable with in every area.

      If we were to write about ‘sometimes it’s good to dry your clothes in a dryer and some people prefer it but try to do it less often’, the point of the piece would soon get lost or watered down. ‘Don’t use your dryer, hang your washing outside and save $1 a load’ is much simpler.

      In terms of streamlining for early retirement, I feel the question above does fit the brief.

  3. Great stuff, I like the history.
    I think we’re on a similar wavelength with insurance, just 3rd party car, contents and health. Though this year I also got ACC Coverplus Extra. Since I don’t pay myself through PAYE, only a shareholder salary at the end of the year, my income is effectively zero until I file an IR3. If I got injured during the year, I wouldn’t be entitled to much under ACC. Coverplus Extra lets me nominate an amount I’ll get if I can’t work due to injury, I think it’s only slightly more than just paying the right amount of ACC levy, it just has to be paid in advance. Could be useful for anyone on a break from work or with an inconsistent income.

  4. Thanks Andrew for your helpful article. We have been insured to the hilt over the past few years. Mainly because of the two kids who are nearly off our hands. The health insurance and the income insurance premiums are the worst. I’ve started putting money into a fund to self insure for health needs. I can’t wait to cancel or downgrade those two policies severely. I’ve found the agents are very reluctant to requote your policies downwards!
    Your illustration of how often your windscreens get broken is very accurate too. I’ve just got a requote on 3rd party insurance with glass cover as our cars are parked on the road and someone smashed a window last year and stole the clothes I had sitting there to take to the Salvation Army so will keep the glass cover. Anyway hope to save a few more dollars till we get to the stage where it’s really only house and contents insurance. Cheers

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