Financial Resilience Part 2 - Insurance

Let me be clear – a lot of insurance is a total waste of money. The insurance industry loves to sell us overpriced insurance contracts that are almost impossible to claim on for things that we don’t really need.

With that said, it is also incredibly dangerous to have no insurance at all.

Certain things are worth having insurance for and other aren’t.

Although everyone will have a slightly different set of circumstances, as a general rule of thumb, I only recommend you insure 4 things in your life.

There is 1 other thing that is either vital or an optional extra (depending on where you live) For everything else, you can pretty much take the risk.

Four Must-have Insurances, and One For Luck 

The 4 things that everyone should always insure are as follows:

Must-have Insurance #1 – You

When you do what I do for a living and you meet so many different people, you quickly learn about the impact that a death or a serious illness has on a family, not just emotionally, but financially.

Although we all think of buying insurance for our homes, our cars, our pets and even our cable TV boxes – it still amazes me how many people don’t even have basic insurance for themselves.

You are your most important asset and probably one of the key resources in your family as well. 

When you go through a near-death experience as I have done, you quickly learn just how fragile life can be.

I think life insurance is vital if you have a family. But even if you don’t, it can pay to have some cover in place. There are three main type of cover for you that I recommend:

A – Life Cover

Pays out a lump sum if you die.

You can also get so called ‘family income benefit’ which is still life cover, only it pays out a monthly income for a specified period rather than a lump sum.

B – Critical Illness Cover 

Pays out a lump sum if you suffer from one of a list of serious illnesses, such as cancer, stroke and heart attack.

C – Income Protection

Pays out a regular income if you are unable to work. This is NOT to be confused with Payment Protection Insurance (or PPI), which is generally a total waste of money.

Which of these covers you should have and how much will vary, but I have created some guidelines on what insurance you should have based on your family situation below.

The following sections are numbered in priority order (i.e. you should have number 1 in place before you move to number 2 etc):

Single, no children, no mortgage

1. Income protection to cover your monthly expenses if you can’t work.

Single, no children, mortgage

1. Income protection to cover your monthly expenses (including mortgage payment) if you can’t work.

Single, children, no mortgage

1. Family Income Benefit life cover to cover your monthly expenses, until the children are 25.
2. Income protection to cover your monthly expenses if you can’t work.

Single, children, mortgage

1. Lump sum life cover to repay the mortgage.
2. Family Income Benefit life cover to cover your monthly expenses (minus the mortgage payment), until the children are 25.
3. Critical illness cover to pay off the mortgage.
4. Income protection to cover your monthly expenses (minus the mortgage) if you can’t work.

Married, no children, no mortgage

1. Income protection to cover your monthly expenses if you can’t work.

Married, no children, mortgage

1. Lump sum life cover to repay the mortgage.
2. Income protection to cover your monthly expenses (including your part of the mortgage) if you can’t work.

Married, children, no mortgage

1. Family Income Benefit life cover to cover your monthly expenses, until the children are 25.
2. Income protection to cover your monthly expenses if you can’t work.

Married, children, mortgage

1. Lump sum life cover to repay the mortgage.
2. Family Income Benefit life cover to cover your share of monthly expenses (minus the mortgage payment), until the children are 25.
3. Critical illness cover to pay off the mortgage.
4. Income protection to cover your share of monthly expenses (minus the mortgage) if you can’t work.

Contrary to popular belief, life cover and these illness protections don’t need to be super expensive. 

For the most basic life cover contracts, you can pay as little as $6 per month for a meaningful level of cover.

With all of these insurances, the younger you are when you apply, the cheaper the premium will be, so get to it.

You should also look for a policy with a guaranteed premium (meaning the cost stays the same for the whole policy) rather than one with a reviewable premium (where it will be a bit cheaper to start with, but the cost will go up over time).

Only you can decide how important it is to protect you and your family, but I spend about 2.5% of my income on protection.

Must-have Insurance #2 – Your Home 

You should also have full insurance for your home and its contents. The financial impact of your home burning down for example would be too big for most people to cope with.

As such, this is vital.

If you have a mortgage, the lender will usually insist that you have buildings cover, but many people skimp on contents cover.

Ask yourself honestly – could you afford to replace every item in your home? Even if you could, would you want to? If not, buildings and contents insurance is a must.

Must-have Insurance #3 – Your Travel

I recommend you always have good travel insurance for any trip you are planning to take outside your home country and even for some trips at home as well.

When I nearly died, I was on holiday in Las Vegas. My medical bill for my three weeks in hospital was almost $300,000!!

I would have gone bankrupt if I didn’t have good travel insurance.

Enough said!

If you travel a lot, you can buy an annual policy to cover multiple trips. Otherwise, for less frequent travel you can just buy an individual policy as you go along.

Must-have Insurance #4 – Your Car 

After your home, for most people, their car will be their next biggest asset. Most western economies make car insurance mandatory for third party claims (damage you do to other people’s vehicles), so you don’t have a choice in the matter.

The optional part of car insurance is whether you want to go for fully comprehensive (meaning that your car would be fixed or replaced too if you get into an accident).

There is no right or wrong as to whether you should pay the extra for comprehensive cover.

If you have a newer car, or one worth $5,000 or more, then this is pretty much a no-brainer.

For cheaper cars that are not worth as much, you could find that the extra cost of comprehensive cover is not really worth it.

Nice-to-have Insurance #5 – Health Insurance (Highly Recommended or Optional)

If you live in the UK, we have the trusty old NHS to get us by if we need medial treatment. As such, private medical cover is strictly an optional extra and most people don’t have this type of insurance.

Private medical cover allows you to be seen more quickly for non-urgent treatments than you would be on the NHS and also gives you some more flexibility over which hospital and doctor you see.

That’s not to say that private medical cover is a bad idea if you live in the UK, but you should only have it if you can afford it and you value this type of cover. Despite our moans, the NHS is actually pretty good most of the time and it’s free!

If you live in the US or another country that does not have a state sponsored health care scheme, then health cover is almost a mandatory insurance.

Americans spend a large amount of money on their health insurance because it really can be a live saver – my $300,000 experience in Las Vegas is testament to that!

Other than this, I think most insurance is probably a waste of money.

You can get insurance for everything nowadays. Your phone, Cable TV box, kettle – desk fan – anything.

Most of this is unnecessary and overpriced (unless you are REALLY clumsy).

I would rather invest the money for my future and then withdraw from my emergency fund if I need a new phone.

The third step on the way to Financial Resilience is to build new income streams. This third and final part of Financial Resilience is also a vital component of Financial Independence.

 Stay tuned for the next post in this series to learn more.