Under-insurance is a regularly quoted by accountants, financial planners, and insurance companies (surprise) as an endemic issue in Australia.
To be fair most of the discussion centres around home and contents, life insurance, and business insurance, areas more worthy of attention than others. But it strikes me that we concurrently have an issue of over-insurance, people buying insurance they really don’t need.
The issue of both over and under-insurance centres on people not having a great understanding of their insurance needs. Whilst some people fail to consider their insurance requirements at all, others have been convinced by unscrupulous insurance operators that they should have insurance to fully cover the potential loss of just about any risk or expense they might encounter.
This might sound appealing but insurance is an expensive form of risk management. Claim ratios at major insurance companies are typically around 60%, which means you are paying a 2/3 premium to the probable value of your protection. I'm not suggesting that insurance companies are gauging, just that underwriting is administratively expensive and private companies require profits.
A better view of the purpose of insurance is that it should be used to protect you from risks that you can’t manage yourself. This would include risks that are either hugely expensive or that could erode your future ability to earn, risks that these sorts of insurance cover:
- Health insurance
- Income protection insurance
- Home insurance
- Life insurance (if you have dependants)
- 3rd party property insurance for your car
But not necessarily things like:
- Tenants insurance
- Credit card insurance
- Funeral insurance
- Travel insurance for domestic flights
- Comprehensive car cover
The last one might be a little controversial, but in my view if you can’t easily afford to replace your car in the event of an accident, the car is probably too expensive for you. If you have a car loan requires comprehensive cover you should look to secure that debt against investments where the interest will be tax deductible if you can.
Insurance is a personal matter; people have different levels of risk tolerance and different coverage requirements. But for the risks you are capable of managing without insurance, you’ll generally be better if you save on premiums and invest that money instead.