Its-your-money looks at insurance
Although this site is mainly concerned with finance insurance is something we can’t really ignore. This page looks very briefly at the four key areas of insurance: general, motor, health/medical, and life.
The aim of insurance is to protect you, the policyholder, from financial loss if one or more of the risks you face in everyday life happens by chance to have your name on it. For example, there is the risk that your house might be damaged by fire or flood. Or the risk that somebody will break into your home, and trash the place or steal something of value. Or the risk of you accidentally losing your wallet or damaging something that you treasure. There is a risk that your dog might bite someone in the street, or a tree in your garden falls into the road and damages a passing car.
The fact that we refer to these possibilities as ‘risks’ means that there is a pretty good chance that they won’t happen. In fact, if it were certain that everyone’s house would be destroyed by fire it would cost as much as your house is worth for you to insure it. The point is, these events do occur and those who are affected by them suffer financially as well as emotionally. We can’t do much about the trauma of being in a fire or being burgled but we can protect ourselves against most if not all of the financial damage. That’s why we need general insurance.
From the money-sense point of view, the rule here as with everything else is ‘shop-around’. If your situation is unusual (perhaps you live in a thatched cottage, or a large country house, or are lucky enough to have some valuable paintings) then you will almost certainly need to talk to an insurance broker. Otherwise, you will probably find the best value amongst the insurance companies that deal direct by phone or online. Don’t take the first deal you are offered. As with savings accounts, insurance companies frequently offer attractive deals to get you to sign up for the first time, and become less competitive when it comes round to renewing the policy.
Most companies offer comprehensive policies for householders that will cover you for the risks that apply to your situation. If you own your home, then you will need to insure the building against hazards like fire, flood, and storm damage. If you are renting then the landlord will normally insure the building and any contents that are included in the rent. Your insurance should cover you for loss or damage to everything in your home. Another part of the policy is what is known as ‘all risks’ and covers your personal portable possessions against loss or damage. That includes clothing, jewellery, mobile phones unless they are insured separately, and perhaps money. You will have to tell the insurance company how much your possessions are worth altogether, and identify any individual items worth more than, say, £1,000. If you have anything especially valuable, then make sure you have an up to date valuation, and keep a good description (and preferably photographs) with the insurance documents.
Finally, there should be cover for ‘public liability’ in case you have been negligent in some way that causes injury or loss to anyone else. For example, if a large tree on your land is obviously rotten and falls into the road and causes injury or damage. If a storm brings down a healthy tree, that is usually regarded as an ‘act of God’ and you won’t be liable for any damage. However, if you own large trees you are expected to have them checked reasonably often. Any branches or trees that could fall anywhere that is open to the public should be checked and if necessary made safe. Public liability usually covers you against any damage or injury to the public arising from any normal activity. If you do take part in any potentially dangerous sport then you should make sure that it is covered by your public liability insurance.
If you own a motor vehicle that is used on public roads you are obliged by law to have at least third party insurance (that means you are insured against injury or damage you cause to other people and their property or vehicles). In most cases you will want to insure your own vehicle against at least fire and theft, and probably accidental damage. The best deals are usually to be found amongst those companies that deal direct online or on the phone. If your situation is unusual, for example if you have been convicted of a serious driving offence or wish to insure an unusual vehicle, then it might pay you to see if an insurance broker can get you a better deal because the chances are you will be quoted a pretty hefty premium if you go direct.
The same money-sense rules apply here too. Shop around each time you renew because returning customers are almost always quoted higher premiums than new customers. At renewal time your existing insurance company will tell you what they want you to pay. Shop around to see if you can get a better offer. You will get a lower quote if you keep your car in a garage, restrict the driving to a few named drivers, limit your driving to so many miles per year, and pay the first few hundred pounds of any claim (called an ‘excess’). Don’t be tempted to tell lies. If you do lie and there is a claim, you may find it rejected by the insurance company. If you get a better offer, then see if your existing insurers will match it. Often they will. They don’t want to lose your business. It’s cheaper for them to keep an existing customer than to get a new one, but they do rely on customers not bothering to look for better deals.
One of the risks we all run is that we may be afflicted with an illness or accident that will prevent us from earning for perhaps several months, or even indefinitely. If we are the breadwinner with a young family and a mortgage to pay then that could be devastating. If you are especially vulnerable in the event of something like that happening then it is worth considering whether you should insure against it, at least during the time when it would have the most serious impact on yourself and your family.
This is a difficult topic to cover because it raises several issues. Firstly, is the ability to have private health treatment in any form something that is desirable or important to you? That may well depend on where you live and what you do, as well as your age, general condition, and personal and family circumstances. If you do feel it is important, then the second question is how important? Do you want to be able to go private under any circumstances, or are you happy to put yourself in the hands of the NHS for some forms of treatment?
The problem with medical insurance is that the risks are very small for younger people, but the probability of a claim rises to become a virtual certainly in later life. Premiums rise pretty quickly once you are over retirement age. Free medical insurance is often an employment perk. Having got used to it during your working life, you don’t really want to give it up when you stop working, especially as this is the period in your life when you are most likely to need it.
Many people feel that by paying for medical insurance for half their life without ever having to use it, they are somehow storing it up. It simply doesn't work that way. Each year, your insurance premium goes to meet the claims that arise in or near that year. If you are young and healthy then the chances are very high that you haven’t claimed and probably won’t claim until you are in your sixties or above, by which time you will be paying a great deal more for your cover. If you have private health insurance, then for much of your life you will be paying (probably over-paying) for insurance you are very unlikely to draw on (but of course there is always the possibility that you might need it). In later years you will be paying a very much higher premium for insurance you probably will draw on.
If private medical insurance doesn't come with the job and you feel you want an alternative to the NHS (especially in later life), then you should consider whether to put the money into your own dedicated fund instead of paying an insurance premium. That way you will have a decent pot of money available for that knee replacement or cataract removal in thirty or forty years’ time. Private medical insurance is developing with more firms entering the market. As a result, there are numerous types of cover available, including policies that cover the risk of a very large claim leaving you to pick up smaller amounts. As well as the usual point about shopping around for the best deals, this is an area where you should think about what it is you want to achieve. Look at all the alternatives including self-funding and combinations of self-funding and insurance.
Our worst fear must be that someone close to us will die prematurely, especially if we rely on that someone’s income for our food and shelter. A sensible level of life insurance should be the top priority for anyone with dependents. In fact most banks and building societies insist that mortgage holders have enough life cover over the term of the mortgage to be able to pay it off should the mortgage holder die. For many families, mortgage cover alone isn't enough and you should take a realistic look at the financial implications of an untimely death.
When it comes to life insurance you have three main choices: term insurance, whole life (assurance), and endowment. With term insurance, you provide for a specified sum to be paid in the event of your death during the term of the insurance. Let’s say you are 30 years old, in good health, married with a young family, and buying your home on a 20 year mortgage. A life insurance policy for a term of, say, 20 or 25 years would not be expensive because your chances of dying during that period are fortunately slim. If you don’t die during the term, the insurance expires at the end of it. What you are doing is protecting your dependents from the financial disaster that will befall them if you die during a period when they are most vulnerable.
Whole life assurance
With a whole life policy, the company will pay out whenever you happen to die (that’s why it’s called assurance instead of insurance). You have the choice of paying premiums for a fixed term (whilst you are working perhaps), or continuing to pay all your life. You also have the choice of whether your policy is ‘with-profits’, in which case an annual bonus is added to the sum assured. The amount of the bonus depends on the performance of the investments that the insurance company buys with the balance of your premium after taking account of the insurance element. The whole life policy is like a combination of term insurance (the risk that you might die prematurely) plus a form of saving. You could achieve the same thing by simply taking out a term insurance to cover the period when your dependents are most vulnerable, and investing the rest of your whole life premium.
In a similar way to the whole life assurance, an endowment policy combines term life insurance plus a method of saving. The difference is that the endowment policy pays out at the end of the term (if you don’t die prematurely) instead of paying out on your subsequent death. Because of their importance to many people as a form of long term saving, and the link to mortgages, endowments are covered separately.
In the next page we look further into the question of saving and investing for the future.
|9 October, 2008 © 2008 K.R.Wade and Co Ltd|