Golden rule for insurance - discuss

magyar

Was discussing with someone at work the other day who said something which made me think:

"If you could afford to deal with the financial consequences of not being insured, it is never (on average) right to take out insurance".

So I can't afford to rebuild my house so clearly I need house insurance, but I could afford to go to the dentist, even if it was painful (financially and dentally), so Denplan insurance isn't worth it. Similarly, life insurance IS worthwhile, cat insurance isn't.

Was trying to think whether this is always the case (provided you assess the financial consequences correctly). This obviously doesn't take into account "peace of mind" which has a subjective value.

Opinions?

Debt_Free_Chick

We use the same rule as you - measure the financial cost of not being insured (assuming the worst happened) and compare that with the cost of paying the premiums for x years.

I don't insure my dog; my dental care or white goods. We do insure our house (buildings & contents) - and partner & I insure our lives, purely so the mortgage is paid off if one of us pops off.

Business uses a similar method - assess the risk. Could we afford to replace/repair if the worst happens? If yes, then no insurance. If no, then buy insurance.

Seems right to me as the cost of insurance can mount up and be more than you would receive if you made a claim. In this case, you would only be getting your own money back with no interest.

We do, however, save an amount roughly equal to the premiums we would have paid, as an emergency fund. It's not scientific though - we just save for "emergencies".

magyar

Debt_Free_Chick wrote:

We do, however, save an amount roughly equal to the premiums we would have paid, as an emergency fund. It's not scientific though - we just save for "emergencies".

I think that's a very good addition to the golden rule. I was thinking that the rule only worked if you were comparing someone who NEVER took out insurance vs. someone who ALWAYS took out insurance, so this way you effectively "always take out insurance" but just don't give it away to someone else!

dunstonh

financial advisers use that rule (note, insurance salesman often do not). Indeed, it is a common reason given for not discussing things like CI or life assurance. "i.e. sufficient lump sums held on investment to cover any potential CI need" or "no-one financially worse off in the event of death".

Insurance is there to pay out when you cannot afford the consequences of a certain event.

Mrs_pbradley936

First on my list would be legal issues. Most of us have a mortgage and they will not let you go uninsured, next car insurance again illegal not to have it. As far as health insurance have had private cover for years, at first via work but took over paying for it when I left. As you get older the premiums go higher but I would not want to be ill just so I could get my money’s worth. Do not have pets but if I did I expect I would have Tiddles insured.

I have travel insurance when I go abroad which is usually to the USA and get a policy from Insure and Go with a huge excess so you will not be bothering to claim for a single trip to the doctor and a prescription for antibiotics (no NHS remember).

magyar

pbradley936 wrote:

First on my list would be legal issues. Most of us have a mortgage and they will not let you go uninsured, next car insurance again illegal not to have it. As far as health insurance have had private cover for years, at first via work but took over paying for it when I left. As you get older the premiums go higher but I would not want to be ill just so I could get my money’s worth. Do not have pets but if I did I expect I would have Tiddles insured.

I have travel insurance when I go abroad which is usually to the USA and get a policy from Insure and Go with a huge excess so you will not be bothering to claim for a single trip to the doctor and a prescription for antibiotics (no NHS remember).

Yes, of course if you legally have to have insurance then that falls outside the rule.

And you make a good point about excess. For example, it annoys me that I can't get MORE excess on certain things...

Travel insurance is, I think, not normally worth going for, unless going to the USA when as you say get a high excess. (Although I get it free with my bank account).

I would put health insurance into the "I can afford it" category, but again, get it free from work, so it's not an issue.

I very much doubt I'd be buying Tiddles insurance, though...

Mrs_pbradley936

Oh and I never buy those warranties they offer when you buy a new appliance. If it goes wrong in the first year it is covered anyway.

dunstonh

Travel insurance is, I think, not normally worth going for, unless going to the USA when as you say get a high excess. (Although I get it free with my bank account).

I beg to differ. If you leave the UK and you suffer an event requiring medical attention then it can quickly mount up in costs. Especially if you need repatriation under medical care. Travel insurance is dirt cheap and good value for money.

I would put health insurance into the "I can afford it" category, but again, get it free from work, so it's not an issue.

It helps to get it cheaper. Although you are not getting it free as you pay tax on it as a benefit in kind.

The policies I see as waste of money are the accident and hospital cash plans. I have come across people over the years who pay more into these than they do their retirement planning. These are cash cows to the providers that sell them. Accidental death insurance is another waste of money as well (assuming normal life assurance is available as an option).

magyar

dunstonh wrote:

I beg to differ. If you leave the UK and you suffer an event requiring medical attention then it can quickly mount up in costs. Especially if you need repatriation under medical care. Travel insurance is dirt cheap and good value for money.

dunstonh wrote:

It helps to get it cheaper. Although you are not getting it free as you pay tax on it as a benefit in kind.

The policies I see as waste of money are the accident and hospital cash plans. I have come across people over the years who pay more into these than they do their retirement planning. These are cash cows to the providers that sell them. Accidental death insurance is another waste of money as well (assuming normal life assurance is available as an option).

Perfectly good points; I accept that I'm probably wrong about travel insurance.

Toothsmith

I belive that the chinese culture sees it as unlucky to take out insurance at all. (Please correct me if I'm wrong). But a tour guide we had in Hong Kong several years ago was telling us that they feel disaster is more likely to happen if you plan for it.

A lot of the really expensive buildings in HK were apparently completely uninsured.

Stonk

"If you could afford to deal with the financial consequences of not being insured, it is never (on average) right to take out insurance".

Precisely true. It economically has to be. If it were untrue, insurance companies would go out of business.

For any given individual, there will be short-term gains and losses from applying this logic, but in the long term you will be better off.

Insurance companies, with many policyholders, see the large-scale averaging effect very much more quickly. If policy pricing was such that it was weighted in favour of the customer, the insurance company would be making a consistent loss pretty quickly.