How do you know which insurance you need, which one will save your life and which one is just a scam?
Insurers don’t ask twice if you want to sign a contract with them. You need to know if the insurance you just want to sign up for is necessary or completely unnecessary. But how do you know how to decide? Let’s take a look at how you can decide which insurance you need.
As I mentioned in the general article on insurance the purpose of insurance is not to remove all risks from your life: the purpose of insurance is to reduce the risk of events that would destroy your life you built up to date without actually killing you (although there is insurance for this as well). Since there are so many insurances available today, it is useful to be aware of which one and to what extent you need it.
Let us see what is unreasonable and what is that the absence of which is unreasonable.
The free market, in theory, works perfectly, according to economists. Theoretically. According to economists. (Don’t look at me, even though I’m an economist, I don’t think).
Then, we could say that no one would have insurance that is a waste of money. But the reality is a little different. (I told you it wasn’t perfect.)
To make it clear here is a little summary of what it would take to make the perfect decisions and what is there instead.
This should be:
- An army of completely rational consumers
- Consumers have complete and perfect knowledge
- These well-prepared rational consumers regularly deal with their contracts.
And the reality:
- At least awed, possibly completely confused customers.
- Customers rely on information that, to put it mildly, is not complete.
- Because no one likes to deal with things they don’t understand, they typically don’t even look at the contracts for years.
So it is already understandable why we see so many cases of chaos. Even if it’s arranged by someone who gets money for it (from getting money for it, he/she is not yet a professional).
There’s the joke when God tells Noah that
– Noah! There will be a huge flood soon that will destroy everything!
– Don’t worry, Lord, I have insurance.
Well, for example, it was an insurance you don’t need.
A little historical overview
I’ve already written about the history of insurance, so anyone who cares more deeply can read this too. Now just a brief overview.
Life is full of risk. Some of these are potential bankruptcies.
A simple example: doctors diagnose a disease in you, then just to save your life abroad can very easily be a batch of millions.
If we all faced this individually, it would be the s*cking category. Especially if you end up on the losing side.
We all have the fear of what might happen to us, which gives space and legitimacy to insurance.
Throughout history, the first “insurances” were not written. When you were ill, the community you lived in (the village, the religious community, the larger family, etc.) hopefully intervened and helped you and your family until you got better. It was an unspoken, “something for something” agreement that allowed you to expect help in situations that might have occurred to anyone in the community.
It was only one step from here that he did not stay within the boundaries of the village, but stepped a little further out. One village helped the other.
From this came that someone with an entrepreneurial spirit stood up and said: It would be much easier if we set aside money together in advance in case of trouble.
How insurance works and why it’s a good idea
The idea:
1. Everyone has to pay into a central fund every month.
2. If any of the members need a payment, will receive money from it.
3. If you don’t pay, nothing will be paid out.
4. If you cheat, you will be hanged, quartered, executed. (let’s say luckily it’s more sophisticated today)
The logic behind it:
1. Let’s say it will cost 36.000 euros to rebuild your house if it burns down.
2. It’s a lot of money if someone has to collect it themselves (as if it were “self-insurance”)
3. But take it that for every 100, only 1 burns down each year.
4. If 100 families come together, they have to put together this 36.000 euros a year.
5. This is 3.600 eur per year (or 300 EUR per month) per family.
6. 300 euro per month? Rather than shovel 36.000 just because someone broke the candle?
7. Sounds like a good deal
They then realized that the probability of a house that is properly built and equipped with a fire alarm burning down is much lower than that of one that does not and cooks on an open stove.
Thus, lower insurance premiums were charged to caregivers and higher insurance premiums to careless people (if they were not fired from the system for this very reason), thereby encouraging conscientious behavior.
That’s how every member wins.
Where does it slide aside?
Insurers are virtually “risk-sharing brokers”. They take risks that are very costly but are unlikely to happen. This high cost is shared within the community so everyone will have a low cost, low probability individual risk.
Ideally, you have to cover events that would be very difficult to insure yourself. By “self-insurance” I mean “to build up a savings that would cover the amount of that loss”.
But today it is almost as if we have forgotten that we need to be self-insured to some degree. And that we can’t insure everything because we almost certainly can’t read all the fine print.
So it’s time to rethink what we insure. What kind of insurance should there be and what can we disregard.
You’ve probably heard of all sorts of insurances that make your hair burn even if you are already bald. There was already insurance against loss of work due to headaches, there was insurance against UFO abduction, there was everything. A lot of them that sound really good, but all of them that you don’t really need.
What are the risks that it is definitely a good idea to pass on to the insurer?
Unfortunately, because insurance companies deal with the currency of fear, it is often difficult to know where to start or assess what is needed and what is not.
Let’s look at some suggested rules of thumb.
Insure what you can’t afford to lose
These are very expensive items: such as health.
Health insurance
You know what the experts say… “Your family is only a serious illness away from bankruptcy.”
This is not a story where you can fool around. You need to make sure that you and your family are protected in all serious illnesses and emergencies.
Even if you can be cured within the framework of social security (if there is), either the family fund or the company fund will face severe outages due to sick pay. And if the problem is more serious, you can completely ruin all the values built up so far.
I think there’s some room for maneuver in outpatient, dental, and medication extras alone. If you go for screenings regularly, you should obviously think about whether it is worth insuring you for this type of risk. But before you let go, it’s not even important then: medical emergencies and hectic treatments will bankrupt you, not the dentist!
I have good news for business leaders: right now, you can account this on to yourself as well as to those who work for the company. (Who exactly can be accounted for is regulated by the Corporate Tax Act)
Accident insurance, Permanent invalidity cover
An accident can happen through no fault of your own and what happened is unpredictable at all. Regardless, it can even change your life for a long time, along with your financial situation.
If you were suddenly disabled, you would probably lose your income. Don’t think it can’t happen – because if you’re wrong, it will rewrite many of the rules in the game.
I read a startling statistic somewhere: in the United States, approximately 50% of mortgage cancellations are due to someone becoming disabled. Even if the situation elsewhere is not so drastic, it is still quite a tragedy if you are the one with whom this might happen.
It is my opinion that many people forget this. Health care costs are still covered, but what about the lost income?!
Insure what you and your family can’t afford to lose
In the event of death, the heirs remain here with inheritance tax, no income and funeral expenses. Its financial cover can be protected.
Life insurance
If you have a family and most of your wealth consists of your house, you need something to make up for the financial loss in the event of death. It covers outstanding debt, makes up for lost income, and helps the family get on with life in a dignified way.
Here, too, company executives have good news: as described in the Corporate Tax Act, you have the option to account for this as an expense. (This typically applies to corporate assetes.)
Insure everything on which there is a credit or you could just make up for on credit
Typically cars and houses. I don’t think you want to end up paying for both the old and the new. You need a new one because the old one is no more, but you also pay the old one because you still owed the bank the original purchase price.
Property insurance
Especially if it’s the house you live in. If you have taken out a loan for your house, or for any reason still have a loan on it, you definitely need to cover at least that.
In addition, of course, the same situation arises when it comes to a business premises.
Most of all, the guideline should be that if you don’t have the same structure on your own, or if you do, but it would place too much burden on you, it is definitely cheaper to take out property insurance.
Car insurance
If you go to work by car, then if you don’t have a car, it means you don’t go to work. For a newer car, where the market value of the car and the deductible are far from equal, it can come in handy anyway.
If you bought the car in installments and it is stolen, it is a serious disruption. You will pay for both the lost car and the car you had to buy to replace it. (And I’m not even giving an example here that an innocent third party could be injured in an accident.)
Questions:
- How do you choose insurance for yourself? How do you determine its extent?
- Do you decide differently as a company manager than as an individual?
- Why do you think it is necessary to review insurance every 2 years with an independent expert? Do you find it good to do this even if you have a broker?
If you have any questions, feel free to write in the Contact menu. I like to read your views and comments in the comments of social media.