It’s time to open this particular can of worms – Insurance!
The topic of insurance tends to divide people. And it usually brings up some emotional debate.
Some think insurances are mostly just a waste of money.
While others think buying insurance is a must, and just part of being a responsible adult.
It’s likely this article will ruffle a few feathers. And many folks won’t agree with me. But that’s ok. I’ll just offer my take on it and readers can decide for themselves.
Since I started this blog, I consider it my job to point out where we’ve saved substantial amounts of money in our life. Also, I aim to highlight a few topics or lifestyle choices, that are often not thought about or questioned.
Today, that topic is Insurance.
Firstly, let’s nail down what insurance is.
To me, it’s a policy you pay, to cover for unexpected circumstances, or if something goes wrong. That sounds pretty sensible, doesn’t it?
But it’s not that simple.
The companies providing this insurance have teams of experts (called actuaries), who compile mountains of stats and estimate how much they will have to pay out in claims.
Then, they set your premium higher than this, so that after they pay their employees and all their other costs, they still make a nice profit.
You’re an insurance company. The money comes in. You then get to hold onto this cash, earn interest or invest it, and you don’t have to pay out any claims until later, when the customer needs it, or possibly never.
And not only that, on average, you pay out less than you receive, while you’ve been earning interest or investment returns, all that time!
Sounds like a great business. Maybe not such a great product.
As a side note: Warren Buffett’s investment business has been built on the back of the huge amounts of insurance premiums they collect – which Buffett uses to buy other businesses, multiplying that money over time, and then paying out some of it later in claims.
So the bottom line is, the odds are heavily stacked against us. It’s like a casino. We can win. But mostly, we will lose.
And like the casino, if we keep playing this game long enough, we’re very likely to end up with less money than when we started.
Now it doesn’t sound so sensible, does it?
So why do we do it?
The answer is two-fold. Firstly, because of fear. And secondly, lack of savings.
Some folks pull their hair out at the thought of having no insurance.
After all, if something goes wrong, what the hell do we do? We’re screwed!
This fear factor is what keeps the insurance cogs turning. And why most people will still opt to have insurance, even if they know, statistically, it’s a losing bet!
It’s important to understand the reason why we have this fear. And I believe it comes down to not having enough savings.
After all, if you had $5 million, would you insure your car? Your house? Anything?
My guess is, if you thought about it logically, probably not. It just wouldn’t make much sense. Remember, it’s a losing bet!
And because you can afford the consequences of your house burning down or your car getting stolen, the outcome isn’t scary at all.
Certainly, it’s not ideal. But the point is, you can easily afford it. So it’s clear, the solution to insurance is savings!
Because most people have little savings and suck at managing money, almost every bump in the road can mean catastrophe for them. So they load up on insurance for their phone, their appliances, their contents, car etc.
While it sounds smart, one of the reasons people can’t save is because they’re spending so much on insurance! It’s a vicious cycle.
These folks need to build some savings and cut out their insurance policies one at a time.
Once they build savings, they won’t need insurance because they can cover it themselves.
Since insurance can be solved by savings, we don’t need more insurance, we need more savings.
As a minimum, we should all be carrying bank balances of $10,000-$20,000. This type of cash balance will solve most short-term emergencies and kill the need for small-problem insurance.
Instead of treating insurance as a cuddly blanket that makes us feel good, we should see it as a money pit with a negative return.
By building our own insurance company, we can put the odds in our favour. Best of all, we end up with a higher savings rate and a larger pool of investments to call on, should the need ever arise.
Rather than assume you need all of it and cut out one or two, it’s more sensible to assume you need none of it except one or two.
After all, the only ones you need are the ones you can’t cover yourself, and can’t find a work-around.
But here’s where the fear comes in. As soon as you feel that safety blanket being ripped away, don’t be scared. Instead, see it as an empowering choice to provide your own insurance, with your own savings!
Let’s say you build up your savings stash to around $20k or so. And the rest of your steadily increasing savings is pumped into your investment of choice, perhaps some dividend-paying shares like index funds and LICs.
This cash buffer should provide plenty of cushion for a few bumps in the road here and there, along with your ongoing positive cashflow from living an efficient and low-cost lifestyle.
Here’s how it works…
After investing your insurance savings, your investment will begin to grow and produce it’s own income, which further reduces the need for insurance – you have a larger asset base and larger cashflow.
Obviously, the richer you get, the less you need insurance.
Most insurance you won’t use for years and years anyway. So the bonus is there’s much more available when you do actually need it.
If you continue paying the insurance, the premium increases year after year, often large increases!
But investing the money instead, puts you further ahead, year after year – making the gap of self-insuring larger and more profitable for your own little insurance company.
Here’s how I think about some of the most common insurances and how we approach it.
We’re currently renting, so not a factor. But in a home-owning situation, we would have insurance, because finding $300k to build a new house would hurt our early retirement. We’d need to sell investments to cover this cost, so one of us would have to work part-time.
Our priority is maintaining our freedom. But home insurance would become less important for us if we had, say, $5m accessible net worth.
At that point, we could comfortably build a new house and some type of stupid lawsuit and our freedom would be completely unaffected. The remaining investments would still provide more than enough income.
No car insurance currently. If we smash our car, we can easily buy a new one for $5k or so. And we’re happy to pay to have someone else’s car fixed, which might cost $5k-$50k. I actually hit a neighbours car badly about a decade ago and it cost less than $5k to fix (it was a new small car).
Even if it’s more than this, it doesn’t matter, it can come out of our growing pool of investments.
Remember, frugal car ownership means less driving where possible, and choosing low-cost cars, so there’s little to be afraid of in this category.
You’re kidding right? No we don’t have this. We used to, until I convinced Mrs StrongMoney that we really didn’t need it.
After all, it’s just furniture and a bunch of other possessions. If our house burns down, we’ll just be happy we weren’t in it! I couldn’t care less about the stuff in the house. Family photos and heirlooms can’t be replaced anyway, so I think this is a feel-good insurance that doesn’t make much sense.
If we had to start over, I’d aim to buy about half as much furniture etc. to keep clutter down, and less expensive things, just because even basic stuff these days seems pretty fancy to me!
On another note, I hear that many supremely unimportant items are included in the price of contents insurance. Things like cotton-buds and deodorant. I kid you not!
Check out this article from Mrs ETT. This preys on people’s laziness in opting out of this stuff. And it probably works. To me, this is fucking ridiculous! Who the hell insures cotton buds!
We have great health cover, it’s called Medicare – one of the best healthcare systems in the world. We used to have private health insurance, but with so many exclusions, escalating prices, gap charges and so many wiggle-out options for the insurer, I don’t think it’s worth it.
If we need some type of non-urgent surgery and the public system waiting list is too long, we’ll just pay for it ourselves. As for ambulance cover and extras, this is spending $10 to save $9 in my view.
If we need these things, again, they can come straight out of our ongoing cashflow. In the meantime, all that money is working hard, earning income and multiplying over time.
As for the tax benefits, I’m not entirely convinced. I believe we have an irrational love of reducing tax at all costs in this country, even if it means spending more than we get back. For high earners, it might make sense. But just go with hospital cover in that case. Extras are only a few bucks to cover yourself.
No, we don’t have this. Once we managed to live on one of our two wages, there was no need for it. One spouse would have been fine financially, with the other one no longer around.
And once a reasonable net worth was built, any need for income, disability and life insurance also reduced. There’s simply no reason to pay for this ‘safety net’ once you’ve created your own.
My view is pretty simple. You should aim to have a very small number of insurances. The number of insurance policies you have should reduce as your savings and net worth builds up.
By living an efficient lifestyle, many of these out-of-pocket expenses will just mean a month or two where you don’t save. It won’t mean Financial Armageddon.
If you have no savings or investments, and currently have no surplus cashflow – by all means, keep your insurance. But work on improving that financial position ASAP.
Next time you’re hit with an insurance decision, remember, it’s statistically designed for you to lose!
It’s a casino type of proposition, albeit one that makes us feel all warm and secure.
Locking in a negative return isn’t very attractive. Holding that cash in the bank would be better. And investing it in higher income-producing assets like shares, is better again.
The stronger your financial position, the less you need insurance. Since building financial strength is my core message, that’s what I want you to focus on.
Clearly, insurance is mostly a short-term solution. The underlying long-term solution is building a large pool of savings and investments. And eventually, you’ll have little need for any insurance at all.
I’ll let you decide which insurance to keep and which to give the flick. But just keep in mind, chances are you’re sending more money out than what you’ll get back!
Financial strength is gained by building resilience into your life with an efficient lifestyle and a war-chest of savings to deal with life’s hiccups.
It’s incredibly freeing to be mostly ‘self-insured’, and we’re certainly wealthier because of it. I love it. And we feel comfortable in dealing with whatever pops up.
By becoming our own insurance company and relying on our savings for most things, we’re tens of thousands of dollars wealthier with each passing decade.
As your investments grow and you get rid of each insurance policy, you’re increasingly putting the odds in your favour. And every year, those investments produce more passive income for you, reducing your need for insurance even further.
This ever growing pile of ‘insurance money’ can be called on should the need ever arise.
So start investing instead, and create an insurance-crushing snowball of wealth and passive income.
How do you feel about your insurance? Is there any you can cover yourself? Would you keep them all if you received a multi-million dollar windfall? I’d love to hear your thoughts…
Note – There’s likely many cases where insurance makes sense for readers. I can’t know everyone’s situation. These are just my overall thoughts on the subject, and what suits our situation.
My thoughts on ‘The Great Taking’. An idea that the masses will lose untold amounts of wealth in the next financial crash, due to a deliberate plan by mysterious figures.
I explain why (and how) I bought a Tesla. The experience so far. How much it cost, and ongoing savings/expenses. Charging options + EV basics. Tax rebates + subsidies. And whether you should get an EV.
Get my latest content and thoughts straight to your inbox.
A fresh dose of financial motivation to power your journey.
Take your point on Insurance, most is a waste of money but most people take it out through fear of the unknown and being hit with savage bill.
The one Insurance I wouldnt get rid of is Health Insurance, daughter is in the Medical field and the public system while very good has its issues with waiting lists and expertise. Nursing care is the same but the expertise of the specialists doing the operations isnt and the real top shelf are mainly Private Hospital Operators. Had a family member in hospital recently and if they had not been insured it would have been 50k for three weeks including a rehab hospital stay.
You also get the benefit when attending a Emergency Dept of choosing a Private Hospital and getting seen straight away if you have Insurance rather than waiting 8 hours to see a young overworked intern at a Public Hospital ED.
Agree on Contents Insurance…..same with life Insurance, …Building Insurance is another I think is a rip off but you need it as we own our own home and it would stuff up our early retirement if we had to rebuild with no insurance.
I should have followed Buffett and put some money into IAG…..there is a man who knows the value of Insurance….not as a customer but as a shareholder taking my money!!!
Thanks for sharing Mark.
So what if you just paid to attend the private hospital emergency department – can you do that? If you were super cashed up would you still pay it, or just pay cash for private when you want it?
Haha he certainly knows how to make the most of that cash coming in! I think IAG has quite done well too since he purchased.
Car insurance. If you crash into a Ferrari or a Rolls Royce or an Aston Martin and write it off you are OK paying the owner the replacement cost?
To be honest, I can’t say I’ve ever driven next to one of those cars! Maybe we roll in different circles 😉
The answer is…I guess I’ll have to be. Seriously though, for us it would probably just mean some part-time work to supplement the reduced investment portfolio.
Yes you have opened a can of worms.
Not entirely sure if this is click bait or comment bait or you genuinely feel this way, but your blog generally has sensible advice so I will give you benefit of the doubt. I wouldn’t bother commenting if not the several major shortcomings of this blog that can lead to financial ruin and bankruptcies many times over for your readers.
Whilst I totally get that anyone want to self-insure your own assets (e.g. contents, car etc) cause afterall, if you can afford to own it, you should be able to afford to lose it, insurance is not simply just about insuring against own damage. A large part of it is insuring against other people’s damage due to your fault (intentional or not). In your example of damaging a new small car, you can count your lucky stars as that is possibly the best case 3rd party damage scenario you could get in. You didnt cause any personal injury to the other party, it was not a commercial vehicle which not only is more costly than a personal vehicle (scared of scratching that ferrari driving next to you? you should be more scared of the oil tanker or truck) but they also carry cargo. There’s a case where a driver has a small crash with another truck which damaged their refrigeration system. Well, it turns out the truck was carrying ice cores, the ones that require expensive equipment to drill deep into the ground to study climate change etc. They cost $5m a pop, there were 6 of them on that truck all destroyed cause the fridge broke, you do the maths. Lucky for the driver (unlucky for the insurer), he was insured. To self-insure any 3rd party damage claim, it is not simply a matter of being $5m rich, you would need to be ultra rich to be able to pay the other party out plus getting dragged through the various legal proceedings. This is what 3rd party motor insurance, aka compulsory third party in Australia is for. Motor 3rd party insurance is possibly the best value insurance anyone with a vehicle will ever buy.
Another 3rd party example, if you own a property, a storm comes through and a tree from your property falls onto a neighbour’s roof? You foot the bill. A fire originated from your home and damaged the neighbour’s home? You foot the bill. Someone comes to your house (delivery guy, charity door knocker etc), trips on a loose bit of pavement and gets injured? You could foot the bill. For good measure, also throw in a bunch of legal costs to defend your case in all of the above scenarios. And btw, if you think you will be OK as you are on good terms with your friendly neighbour? Well, it is not your neighbour who you’ll be negotiating compensation with, it is more likely that they have insurance so you will be dealing with their insurer (cue the big bad wolf music)
Life insurance you can argue to self insure with savings, but you need to be at least a high net worth to be able to do that. The reason is if you are relying on any work related income (ie not passive income like dividend or rents) to live on and service bills/debt, it is a severe mistake to assume that the remaining healthy person can work unencumbered. The healthy person most likely will need to take some time off to care for the sick person. And if there are kids in the picture, the healthy person will need to either hire help, ask family members to step in, or stop working altogether to take care of sick person plus kids. All of this reduces the healthy person’s normal level of income.
Health insurance, or more specifically hospital cover, you can also argue to self insure but the downsides can be tremendous and stressful. Public system (or Medicare) is great for emergency and life threatening stuff. But if you need non-life threatening (but seriously uncomfortable) elective surgery? Good luck with the wait in the public system. Also, private rooms are not a luxury, its a necessity to get good rest and recover from whatever you have without being disturbed by your neighbours cause their beeping monitor keeps going off and staff coming in and out to check on multiple patients. Anyone who thinks public hospitals are fine for extended stays either can’t afford private or have never been in hospitals for extended periods (like more than a few days).
With both life and hospital insurance, even if you’re young and healthy, sometimes, sh!t happens and you get seriously injured and sick.
I totally get that people have a bad impression of the “profit making big bad insurers”. But if you study their financials closely over an extended period of time, you will see that it is incredibly hard to consistently and sustainably make money in this business and its a delicate line they tow from profitable to loss making. Berkshire’s success and contributions to Buffett’s portfolio is not cause its an insurance company, its because of Buffett’s ingenuity. Put it another way, insurers is on the very last of my “stable blue chip” list of industries to invest in as I have so little confidence in them being able to make a sustainable profit.
TLDR – To self-insure and save on insurance premiums upfront (unless ultra rich, but then why are you reading this blog?), you can come out the other end financially and mentally much worse.
Thanks for the comment – and for saying my blog is generally sensible 🙂
It’s pretty clear you’re a fan of insurance. Obviously we have very different takes on the subject and are unlikely to agree!
The article is genuine I assure you – I don’t write this stuff for the hell of it, or for ‘clicks’.
While you have stated situations where insurance is (potentially) immensely valuable, these really seem like end of the world type scenarios. Perhaps I’ve just had a lucky run and the odds will turn against me soon. But I don’t think I’ll be insuring against multi-truck smashes holding $30 million of equipment anytime soon. We barely drive at all these days to the point where we’re considering not having a car at all, there’s simply no point.
We’re not home-owners so that one doesn’t concern us – but sure I’ve heard of (ridiculous) cases like that where the owner is sued.
Life/disability – In our case, investments plus living on less than one wage would mean that even in a disability scenario, the other person would have coped by taking time off or hiring help.
Health insurance – hmm, I would expect you to be exhausted and drugged from surgery to be worried about what your hospital neighbours are doing (beeping machines). Had a nephew of mine in public hospital recently and I was pleasantly surprised at the conditions.
Of course insurance companies don’t ‘consistently’ make a profit year after year. Much like casinos, their profits are incredibly lumpy. But over time they do just fine because the odds are stacked in their favour.
Actually yes, the size of Buffetts company was made possible because of the ‘float’ his insurance companies have generated. Both Warren and Charlie have said this in the past. He’s an incredibly smart businessman too which helps. With his intelligence and business experience, do you think he’d own multiple insurance companies if they didn’t make any money?
You must have missed the part where I said ‘Readers will have to decide themselves. There’s likely many cases where insurance makes sense for readers. I can’t know everyone’s situation. These are just my overall thoughts on the subject, and what suits our situation.’
Thanks for your comment, even though we have completely opposite views!
And I just realised there is a critical line in your life insurance section. You wrote “One spouse would have been fine financially, with the other one no longer around.”.
As morbid as it sounds, if one spouse dies that IS the best case scenario. Its when they dont die, but are too sick to earn an income or worse still be incapacitated (even if its for short periods), that is when it is both a financial and mental drain.
Like I said in my previous post, I give you benefit of the doubt for this article as your others are generally sensible. But you’ve really chosen the best case scenarios (maybe not intentionally, but perhaps you’ve never experienced or known anything different) in alot of your arguments which will give your readers a false sense of security.
Sure in some cases that’s a reasonable concern, but in other cases it’s not. I don’t agree with your ‘always insure everything’ angle.
As I said in another reply – we both had plenty of leave we could take from work before we retired should that have happened. And investments to cover any additional expenses or lost income.
Best case scenarios? I think I’ve chosen ‘reasonable case’ scenarios. Like smashing a car that’s not a ferrari. Like a spouse dying or getting sick where you don’t already spend all your money and have zero net worth. Like buying new furniture when your old stuff burns down. I don’t think one spouse dying prematurely is a best case. I don’t think paying 10-20k for an elective surgery is a best case. The best case is most of this stuff doesn’t happen.
It’s the place in the middle I want readers to think about. We both obviously have a different view on reasonable expectations.
At the end of the day, I’ve told readers to think about it and decide for themselves.
Phew – I don’ t feel so silly now. We gave up private health insurance years ago (to everyone’s horror) simply because we receive just as good a service through Medicare – I’m more than happy to pay the levy. No contents insurance here either and we have just ditched our life insurance because we have enough without it. (Life insurance through super is also notoriously hard to claim too I have heard)
Car insurance is the last hurdle – working on it.
Phil
Cheers Phil.
It’s a super emotional topic as you can tell from some of these comments!
Certainly sounds like you’re on top of your insurances.
Hi Dave
A well considered and thought provoking post. However, I disagree with you regarding your views on private health insurance. Whilst medicare is a good system compared to other health systems in the world, it leaves much to be desired. The government seeks to promote Medicare and the public health system as being able to provide equitable health care for all – this is an electorally popular position – but far from the truth.
Without private health insurance, you are asking for sub-optimal care. If you are admitted as an emergency patient to a public hospital as a public patient and you require surgery, it will be often performed by trainees. Public hospital are training environments. Why risk random people with variable experience operating on you in your time of greatest need. Private insurance usually means that you will receive an operation by a specialist surgeon as well as post op follow up. Multiple studies in the medical literature have shown that uninsured patients have worse health outcomes.
For non urgent surgery, you mention that you would simply pay for it if you are uninsured, in order to avoid the public hospital waiting list. It is not a simple matter of paying for the surgery should you need it. All surgery carries risks. Sure you can pay for the procedure itself and the private hospital costs but if something goes wrong and you need an extra week or two in the private hospital to recover, then you will be easily set back six figures. Unexpected scenarios can occur with all surgery and you may not be in a good enough state to be transferred immediately to a public hospital nor can you expect that they will receive you immediately should you have an unexpected problem as a self paying, non-insured patient undergoing elective surgery in a private hospital. For example, each day in a private hospital costs about 3000 dollars. You may have budgeted for a 3 day stay in a private hospital after your elective knee replacement surgery but suddenly if problems occur and you need to stay two weeks, then this will compromise your financial freedom, especially if you have retired early.
A lot of young people feel frustrated that they seem to pay a lot for health insurance but do not see the value of it as they rarely require it. However, when the day comes, and you suddenly need a few surgeries in a row, then you will be very glad that you have good private health insurance. In some ways, Medicare is like travelling by public bus – we dont know the driver or whether the bus will really come. Private health insurance is like driving your own car. You can be in control of your health and destiny.
Thanks for your comment Jon.
Sure Medicare isn’t the best. But it is up there among the best in the world.
I’m not convinced that my surgery will be done by a young whippersnapper just figuring it out as he goes. Maybe it is done by trainees sometimes, but it’d be over the watch of someone very experienced who knows exactly what’s going on. Like an ‘L’ plate driver – sure they may be slow and not perfectly smooth, but under instruction from a professional, they can perform the task safely.
That 40k hospital stay you’ve outlined would not affect our early retirement. For some people it would, and they should consider that. I did say that people need to decide for themselves at the end of the day. These are just my thoughts and what we feel comfortable with.
You would be surprised. Sometimes? – no, almost always the surgeons in public hospitals are the trainees. Trainees frequently operate alone, the consultant may just pop his head in at the start or end but does not usually stand there supervising unless the trainee is literally at the very start of training and trying the surgery for the first or second time. The mantra in the public hospitals is “see one, do one, teach one” – not “be observed and guided step by step every time.” Likewise in emergency departments. On the ward – the senior is there for an hour in the morning then goes off to do his private work. Anything goes wrong on the ward, often it’s the intern fresh out of university that has to deal with it first and can be a while before anyone more senior comes along to provide assistance.
You’re also biased by your age. As you get older the cost and frequency of needing medical care only goes up. You might find yourself having – as a real life example – a hip replacement, a hip washout, and a hip replacement revision, in the space of two months. (And public hospital for these? Please. The waiting lists for non urgent orthopaedics surgeries can be years)
Sure, so my thinking is if we need something that can’t wait as we get older we can simply pay up for it.
It is correct that trainees are supervised but that does not translate to having their hand held. Lets just say that errors generally are limited in degree. Another area for thought is that although there will always be good operators available, without appearing too paranoid, the underlying attitude of many entering the health professions is not necessarily on par with that of 20-30-40 years ago. This is as much a reflection of changing paradigms in student selection – IQ does not necessarily translate into attitude/aptitude.
I believe that health insurance probably sits within that 1-2 policies that would be a keeper. Everybody to their own though.
Very good food for thought. Have third party car insurance just in case I hit a very expensive car (luckily haven’t but you are right, the fear if that happening is worth the cost to me).
Other than that I have income protection as I don’t have that secure second income if something were to happen.
One I have considered letting go is life insurance. Having no dependants, no debts and no house/mortgage I’m not really sure why I’m paying this one…it just came within my super and I never cancelled. Perhaps I should reconsider.
Thanks 🙂
Yeah that expensive car worry seems to be pretty common, understandably so.
Sounds like you’ve approached it sensibly Miss B. Most super funds come with insurance setup automatically. If you aren’t leaving anyone on struggle street with debt, but instead leaving your family some assets, it seems unnecessary to me.
Really like your perspective on this SMA. The maths is clearly a losing game on average for customers, but unfortunately the vast majority of people can’t risk having to fork out thousands of dollars unexpectedly.
Personally I do have insurance for most things, but I go with a high excess and a much lower premium. I only want to be protected from complete disaster scenarios, and hopefully I’ll get to that point eventually where insurance just won’t make sense to keep financially.
Was surprised to see the pet insurance at the end though! This is the one I don’t have (and yes I do have pets!), as any issues with them aren’t going to ruin us financially, and always felt this was the worst of all insurances when it comes to your ‘expected return’! Sounds like you got a good deal though and it makes sense for your circumstances. As you say, it’s all about weighing up the risk and reward in the long run.
Thanks for your support Frankie!
High excess is the way to go I think – at least it’s there and lower premiums.
Haha yes the pet insurance is an odd one. We found it’s been a profitable thing to have when our little man has had some issues. With a lower risk pet it may not be worth it. It’s not cheap at all but I still think it’s likely we receive more back over the rest of the policy.
while i agree with you on the topic of insurance and the fact that it is potentially a scam, just a few questions:
you don t have car insurance, do you mean nothing above ctp? that s fine if you crash into a car that is worth $9k… what if your car gets into fire and starts to burn down your appartment building? we re not talking about a few thousand of dollars
for life insurance, it might not be only the fact that you can live on one salary. what if the other party needs to take a few months out of work to recover?
lastly $20k worth of savings is good, i prefer to say 3 to 6 months worth of expenses as everyone might be different: 3 kids in day care in sydney and 20k in the bank would last less than 3 months.
not criticizing, opening room for thoughs. your article is really good. cheerd
That’s correct. We only hold CTP.
You’re right, if I managed to burn down a building somehow, that would be a pretty damn nasty shock. Can’t say I’ve heard of that happening too often, so I’m not even sure what happens in that situation! We drive very very little these days, and I’m a very slow driver so that may help reduce that risk.
Life insurance – for us at work, we could have taken time off using bereavement leave, annual leave and sick leave until we were recovered. Others may not have this option which is why I said ‘it’s what suited our situation’.
Definitely more cash in the bank is good – but there’s also opportunity cost of not investing that money. It’s always a trade-off. 20k is actually 6 months spending for us so that’s quite comfortable.
Hi SMA,
Respectfully I must disagree with some of your views. Yes having enough savings and passive income does remove some the need for insurance, but it does not mitigate all of the risks.
Private health insurance for me is non-negotiable. Not hating on the public system, but it is really there as a safety net. I worked hard to afford the best quality health care I can get and will happily pay the doctors fee (gap) for any medical treatment.
Comprehensive car insurance or at a minimum 3rd party is non-negotiable. If I ding a Ferrari in the parking lot I could be forced to sell my investments and return to work.
Home insurance. Legal liability is a huge one as others have mentioned.
I’m 100% content and happy driving around in a small hatchback to minimise consumption, but I won’t compromise my health or be naive to any legal risks that may undo everything that I worked so hard to achieve.
Thanks for your thoughts Jack.
You’re correct it doesn’t mitigate the risks – nothing does. The risk is always present.
Well medicare is not exactly a freeby – we’re paying for it every year. And I’m sure the doctors are paid well. Kind of like public schools which we indirectly pay for. Just services that we all pool in money as citizens to get benefit from. That’s how I see it anyway.
Having seen some old rough figures of your assets Jack – I don’t think that’s true. You could probably fork out a large wad of cash and still be retired – even though you might need to sell off something which won’t feel good.
Will revisit home insurance if we ever become owner occupiers again.
‘You’re correct it doesn’t mitigate the risks – nothing does. The risk is always present.’
I think you’ll find Jack was referring to ‘having enough savings and passive income’ as not mitigating all of the risks, not insurance. Insurance does in fact mitigate risk – that’s the point of it.
Your blog is heavily experiential and you should be congratulated for encouraging people to value their earnings more. However, I do think on the issue of insurance you’ve missed the mark by quite a margin and have drifted into misinformation:
I work for one of Australia’s largest insurance companies and can tell you that they’re not the big bad wolves you seem to think they are. Putting health insurance to one side (which has government regulated price rises and has good arguments on both sides whether to be in/out), general insurance and life insurance is such a competitive environment where returns are low. In the Life Insurance space, insurers in Australia can barely turn a buck (making 3-4% a year) and they’re all selling out to foreign buyers who are happy to hold the immense capital against which paltry returns are being made.
In the general insurance space (thinks cars, property, pet, etc), however, insurers are constantly walking the fine line between attracting and retaining existing policyholders with competitive premiums that offer decent coverage, while trying to satisfy shareholders with decent returns (8-10%) on the capital that APRA requires be held against the insured risks.
Insurers understand “risk” and yes, employ actuaries to help identify appropriate pricing. But they also have to model claims expense, and capital requirements to support the outstanding claims liability, and report this to APRA on quarterly basis. But understanding risk also means covering yourself. Yes, insurers have insurers: it’s called reinsurance. They might engage in a quota share arrangement, for example, and “sell” 50% of the premiums on certain policies to reinsurers to spread 50% of the claims risk. Alternatively, they might have an “excess loss” arrangement where the reinsurer steps in if claims from a natural disaster exceed a certain threshold.
Just like in investing, diversification is key to insurance and reinsurance. By spreading the risk of offering insurance to policyholders, insurance companies cover their own risk of – you guessed it – otherwise “self-insuring”. Just like insurers the world over spread their risk across the industry through taking on a minor reinsurance penalty against their profits, so to should individuals consider the benefits of a minor insurance hit to mitigate against substantial loss. The reason it’s a “no-brainer” is that insurance companies know in advance there will be claims to pay out. To whom and for how much is not known before the event. Shit happens and if the proverbial hits the fan for you, you’ll want to be included in that claims liability on the books of insurers.
Insurers understand their risks and, rather than take it on themselves, insure their risk with reinsurers. Your excuse for going it alone can only be based in not fully understanding risks and/or the benefits of insuring against those risks.
Insurance: I’d rather pay for it every day and never need it than need it one day having not paid for it.
Thanks for sharing your in-depth knowledge of the insurance industry. You probably know more about it than I ever will.
As with most things on this blog, these are only my observations and thoughts on certain topics – even within those topics my knowledge is limited. People need to decide for themselves what suits them, in the areas of investments, lifestyle, and things like insurance.
Regarding risk – the risk of something going wrong is the same, was my point. Whether you think you can cover it yourself or with insurance is the decision that needs to be made.
I’ve never said insurance companies are big bad wolves? I’ve never said they do anything that’s wrong or that insurance as a whole is ‘bad’. I’m trying to get people thinking about it rather than just blindly accepting it. I’m just saying look, they make money (albeit in a lumpy way), even after all their employees, equipment, offices etc. are paid for. At the end of the day, as a whole and on average, it is a losing bet for the end customer.
It’s a game of probabilities for everyone involved and it’s always a cost vs benefit trade-off. Some benefits are not measurable like peace of mind. We all sit somewhere on the scale from zero, leading up to ‘insurance at all costs’. Obviously I sit lower on the scale than you.
I still stand by the core message of the article – the stronger someone’s financial situation (net worth, investments, savings rate, personal flexibility) the less insurance they need (all else being equal).
Can appreciate you have a different view. Cheers.
Of all the insurances, I can’t believe the only one we don’t hold is the one you do! Pet insurance came with our kittens, but we got rid of it within the first year, deciding to self-insure for them. I agree that knowing your breed is important in this case. We used to be able to insure our dogs under our Contents policy, which was so cheap! That became grandfathered, unfortunately.
I am slowly coming around to the idea of reducing my insurances. We’ve started with life, and I’m pretty sure that I’ll drop comprehensive for my car when the time comes. Contents can take a big drop as well this year (those items were ridiculous, weren’t they?)
Health insurance is the hardest one for me to give up. Not only because of fear about what may happen, but because I see it as a sunk cost. We’ve been paying into it all these years, now we’re older is when we should start using it. Like Frankie, we have the highest excess and copayment we can, with only hospital cover. It’s been over a decade since we decided not to bother with extras, and that has certainly been a saving.
Each person has a different level of comfort when it comes to fear of the unknown. Statistically, you’re probably fine not being insured, particularly because you have enough to start again if you need to. Touch wood, I’ve made it through 25 years of driving without writing off a car; that’s 25 years of premiums I’ve paid in order to gain about a $5,000 payout if I wrote mine off tomorrow. Value? Not at all.
However, it’s because we’re not FI that I will continue to pay some level of some insurance. I’d hate for years and years of hard slog to be wiped out in a single incident. The more we save, the less insurance we will have.
PS We spent $5,500 on all the various insurances last year. That means one of us is working for over a month every year just to insure against “what if”!
That’s quite interesting 🙂
Geez that contents insurance did include everything didn’t it 😉
I’m glad you wrote that post as I had no idea the of the extreme pettiness those contents policies got down to!
Ahh that’s an interesting point – the sunk cost. It feels as though the value is ready to come due, that makes sense. Nice job on chopping the extras too.
It’s a pretty emotional topic due to the fear and what ifs involved. I think some folk missed my disclaimer because they were fired-up, in a pro-insurance rage. I was expecting some backlash. It’s a personal thing and everyone’s free to choose what feels right for them. As long as people take the time to question it instead of blindly accepting it, that’s the main thing. Thanks for contributing to the conversation!
A scenario that pops up here of your tree falling on a neighbours house. Last time I looked into this it was covered under their insurance. Is that not right?
Not sure about that one mate. Maybe google or an insurance company will be able to answer that.
Few hundred dollars a year is a small price to pay for a good night sleep, not everything can be calculated in terms of dollar value. but agree with you, insurance companies are there to make $$$ and odds are staked against us.
Yeah it’s true, it’s not a lot. But the thing is it’s not just one – there’s 5-10 different insurances that are gobbling up cash which turns into a rather large sum each year as Mrs ETT commented above. Everyone will differ but I think we have to draw the line somewhere.
I don’t agree with everything in this post. However what I really like and respect is SMA challenges conventional thinking.
I know in my circumstances I don’t like to over insure. Some examples of this are as follows.
Once our cars get to about $5000 in market value (which in itself is a joke) we switch to third party insurance, saving $600 a year. Also we live in a fire risk area, our house insurance tripled after a natural event in our area. By increasing our excess to $5000 we save over $1000 a year in insurance premiums. I mentioned to several people what I have done to ‘save’ money and I’m given a look as if I’ve lost my mind. But…hang on…. I only want to insure against a major event! I can wear the cost of a broken window or an appliance blowing up.
Many people I know insure their $1400 mobile phone. I don’t need to as I’m using an older smart phone.
I believe a certain level of insurance is needed to protect against a MAJOR financial event. The insurance companies are only getting the bare minimum from me!
Thanks for sharing your approach, really appreciate it! And you understand my underlying message perfectly. It’s up to everyone to decide what’s best for them, as long as we’re thinking about it rationally and questioning the ‘accepted wisdom’.
It’s a very emotional topic, some folks want to be ‘protected’ against everything – so that then if something occurs, no matter how small, they’ll be compensated in some way, which feels good.
It sounds like you play the insurance game the right way – weighing up the odds and the cost, in an unemotional way!
That’s such an amazing topic, insurance… It cost a lot and rarely is used, and sometimes does not apply for your house when a natural disaster destroys it.
The problem, i would point out in a very Nassim Talebbian fashion,is if the adverse effect is fat tailed. By that, i mean, does it have a very high impact of your net worth if it occurs?
A poster child of this would be loosing your house in a fire. For most people, it would likely mean loosing for than 50% of your net worth, sometimes more. You can not afford it in this case, don’t be like LTCM and assume that rare event=never event.
I know from memory that you are supposed to keep 6-9 month of living expenses in cash (is it the 20k ? 🙂 ) in case something bad happens. Logically, the insured risks should probably be the ones that hit more than say 50% of that buffer so you have time to build it back up. I’m wondering what an actuary would say. It probably also depends on the time it takes to build back the buffer.
Thanks David. I wouldn’t mind talking to an actuary about it – would be interesting.
You raise a good point about small risks with a large negative outcome. We should definitely be thinking about that. I fully agree if someone’s house burning down will cripple them financially, they should insure against that. But for someone with a few million accessible net worth and a modest house, it’s not as clear cut. You could say there’s probably a certain net worth that will cover virtually each large scenario. Not nice to have to pay it out but it can be done is the main thing.
I think 20k is a reasonable starting point for folks who have their finances in order already and are saving regularly. This will cover for contents, low-level car collisions, phone, pet, low-level surgeries etc. Now, everyone will have different levels of spending, so higher spenders probably need more cash standing by. But people who live efficiently (frugally), and especially dual-income couples who are working and maybe living on one wage are in a far better position to deal with unexpected bills like this. It’s a guessing game and balancing act for everyone involved 🙂
I agree that insurance is a bit of a joke. But not in the way you look at it. You’re looking at it from a probability perspective. The issue I see is excessive potential costs of an event for individuals. Ie if I self insure, why should I have to pay for your Ferrari? I’m happy to pay for a $50k car, that’s reasonable. But the rest you can cough up. This ought to also bring down the cost of the third party component of insurance. Same goes for health insurance. Others make poor health decisions that I end up paying for.
We now have a situation where the otherwise sensible choice to insure is brought into question because of the decisions of others. It should be a rudimentary principle in insurance that others’ liabilities are limited in respect to your lifestyle choices. This would provide more bang for buck for consumers and would the shift the burden of responsibility on to the decision makers themselves.
Thanks for the comment Todd – though I’m not sure I totally understand. So are you saying, if someone self insures and damages an expensive car, they shouldn’t have to pay for the total sum of it because a Ferrari is an unreasonable lifestyle choice? I’ve never thought of it this way before. If I ever hit a Ferrari, I’ll see if the driver wants to settle for a new Toyota Corolla – I’ll try and persuade him with efficiency and opportunity cost 😉
For insurance, would you suggest putting a hard limit on the insurable amounts?
My understanding is those with more valuable possessions who want more cover have to pay more in insurance. This implies that it would probably even out. And in the case of personally tailored insurance like Youi and the like, you now are charged less if you drive less, for example – which is a great idea. You make a good point though, that I haven’t heard before. Possibly it would be cheaper if liabilities were capped to a ‘reasonable’ level in many cases. The catastrophe type events that some folks have pointed out still happen, and there sometimes nobody’s fault and involve buildings or equipment that is not a lifestyle choice.
Maybe insurance will change over time and become a lot more tailed to a specific individuals risk (where possible) and less based on averages.
This is so topical and well done for putting your views out there. Coincidentally, we spent the weekend looking at the insurance we pay and came to this conclusion:
Contents Insurance we decided to keep, only for the included public liability cover, which presently stands at $20million (up from $10million not so long ago so you have to wonder what legal precedents have been set to justify this massive hike in coverage). These are crazily litigious times and while we personally think we lead “blameless” lives, even an unwarranted lawsuit will cost you many thousands. We did shop around for Contents Insurance and this morning switched over to a budget insurer and have slashed our annual premiums by over three-quarters.
Car Insurance just fell away when we got rid of our car at Christmas, and car-sharing and rental cars come with insurance for the time you need it. Simple.
Life/Disability Insurance we deem utterly ridiculous as we are mortgage free and retired (early, hooray!) and while it would be a sad event to lose a partner we neither of us feel we need a financial windfall to soothe the grief.
Health Insurance is the big sticker. For a couple of decades we’ve had top hospital cover (there is no benefit in bulking the premium up with all the “extras” – if you want new glasses, just buy them) and have had to use it for elective day surgeries for an ongoing health issue, but it’s hard to know if it’s paid for itself over that time. The “gap” payment in no way covers the reality of having a senior specialist attend to you and overnight hospital stays themselves can be very expensive – we had an interesting experience last year where the out-of-pocket expenses for wholly unexpected specialist surgery, a 2-night stay in a private hospital with one night in intensive care (it turns out you aren’t covered for the doctors who attend to you) plus around 6 CT and MRI scans ran to around $10,000. So really, you do need to self-insure on top of having some insurance as life can throw out some surprises. The advice that came from a discussion with a surgeon about the pros and cons of health insurance was to remember that as you age, you are more likely to have “mechanical problems”, and joint replacements can be costly to self-insure. He also said that as an ENT, he’s no longer doing nose/sinus surgeries in the public system as the government has stopped covering surgeons for that and a whole suite of other surgeries. He thinks a “crunch time” is coming with the Health System as a whole and where this leads is anyone’s guess.
Bottom line, while we’re happy to go budget insurance for Contents and decide at the time of any claim if/how we really want to replace what may get lost/damaged, if hubby needs a new heart or knee at some point in the future, we really would like new-for-old cover!
Thanks Vanessa and great comment. Woohoo, congratulations on being early retirees!!!
Nice job getting rid of the car! We’re leaning that way at the moment, it barely gets used. Just used a rental car for a long country trip and it was a pretty good experience.
I didn’t know contents came with liability – I thought liability came with home insurance? Maybe I got that confused.
Fully agree – there’s no free lunch with extras. Many of us like to irrationally get ‘free’ stuff and ‘rewards’ even when we’re paying for it the whole time. Interesting story with your health insurance – seems many times there’s likely to be out of pocket expenses anyway.
Thanks again for sharing your experience!
Damn those Ferraris! Everyone seems terrified of them. Considering how few of them are on the roads and we would all be giving them such a wide berth, the risk of damaging one with our humble vehicles is nonexistent! 😉 Great article and definitely food for thought.
Haha! Thanks Danielle, glad you enjoyed it!
I generally agree that many insurance products are not necessary. Don’t even get me started on “funeral insurance”!!! My god, talk about preying on the guilt and insecurities of the elderly! I’ve told my wife to just chuck my body into the street and have the council clean up crew dispose of it. 😉
Having said that, the entire idea of insurance is that by spreading the risk around the company taking on the risk will come out ahead at the expense of any individual policy holder. In return each individual policy holder gets the assurance that if the risk insured against comes to pass the insurer will foot the bill.
Rather than deciding if the insurer is going to “come out ahead” from your premiums and making purchasing decisions based on that, you should be deciding if the product/service is worth the cost to you.
There are some insurances that I personally think make sense to have based on the cost benefit analysis.
1: Home insurance – I took a random number of $2500 per year for home insurance. Most of mine are way less than this. Invested, added to annually and returning a generous 7%pa you’d need to pay about 20-30 years worth of premiums (based on the average cost to build) before you’d come out behind on this one if your house was destroyed and you had to rebuild. Not just that but I reckon there would be very few self funded people that could actually pay the demolition and waste removal costs along with the replacement building costs to build a new home without taking a massive hit to their net worth and subsequent income stream.
2: Health insurance – I agree, Medicare is great. I agree Extras cover is a waste of money. However, having needed the private system to avoid a 2 year wait for an elective surgery that would have seen me unable to work during that time if I didn’t have the surgery, I can tell you it can get very very expensive very very quickly if anything out of the ordinary occurs. I ended up with a Golden Staph infection in my epidural space. An MRI and CT scans to diagnose the problem, a computer guided extraction procedure, 3 weeks in hospital, another 6 weeks on intravenous antibiotics at home with a daily visit from a nurse to change the dispenser, another 6 months of oral antibiotics, a revisit to hospital to manipulate scar tissue, the associated higher costs of recovery and rehabilitation and 6 months off work. In all likelihood because a nurse didn’t get a new clean needle after dropping the first on the floor, though I would have had to foot the legal costs and roll the dice in court to try to prove negligence if I wanted to try to recoup the medical costs. I would have needed to invest over 30 years worth of premiums, compounded at 7%pa to come out ahead on that one. That’s just for the medical bill.
Considering in both cases I have no way of knowing if the event will happen (or happen again as the case may be) in the next 20 or 30 years, I think the product/service I am purchasing is value for money. Maybe in 20 or 30 years time I will end up “behind” financially but I would also have missed out on the 20 or 30 years of peace of mind and I will come out ahead if either event does happen. (as I already have with health insurance)
Haha I like your view on funeral insurance – it is a bit sad and preys on peoples feelings, as many of these products do.
I was saying that people need to consider it for themselves, not just consider it good or bad, but weigh it up objectively, not emotionally.
Yeah I hear you on the house insurance – but on the flipside, that’s like saying you’re betting your house is going to burn down every 20-30 years. For all of us, this just isn’t a good bet. But if it cripples people financially for it to happen, then no question, they should have the insurance.
Appreciate you sharing your story, sorry to hear about that. Definitely paid off having the insurance in that case.
You make a good point – the peace of mind matters greatly to some people and they’ll elect to have insurance because it feels better than not having it. And that’s perfectly fine. As long as we’re honest with ourselves why we’re paying for it and not just thinking it’s ‘insane’ not to have it by assuming full insurance is always better.
Thanks for a nicely balanced and rational view 🙂
Hello,
Thank you for a thought provoking post. If I could pose a counterfactual, at what point would you consider (e.g.) health insurance? That is, accepting you elect not to take out private health insurance for now, what change in circumstances would prompt you to do so? And would those circumstances be purely financial (i.e. when the insurance cover outweighs the cost)? Or do you think at some point emotional cost would enter into the equation?
For example, if (touch wood) you had to undergo two surgeries in the near future? Three surgeries? It’s helpful to know at what point (roughly) one would be willing to take an opposing view – even if this likelihood is low. I think at this point a ‘quality of life’ consideration may start to play a factor.
Another example which I might have missed in the comments above is travel insurance. It is highly likely that people will continue to travel overseas, at increasing frequencies, for increasing lengths of time, in a variety of less-developed locations (we are so, so, so lucky in Australia). In these circumstances, one unfortunately might not be able to rely on the same standard of public health-care if misfortune.
I understand that one of the first questions posed to people when they encounter medical strife overseas, whether traveling or working, is IF they have travel and medical insurance in the first place. If not, the options available may be reduced. It’s the first filter; the level of cover is a secondary consideration. Point being there are circumstances where the presence or absence of insurance can drastically affect the options (or lack of) available subsequently.
I would argue insurance is one of the many financial considerations that people have to make about their specific circumstances – but importantly, on an ongoing basis. It might be difficult to adopt a ‘set and forget’ strategy towards insurance (e.g. “yep, not for me”), because it’s a risk mitigation tool. And like any tool, the need or otherwise for it needs to be constantly reassessed, depending on the circumstances at the time.
But one of the unfortunate characteristics for insurance is that, as far as I’m aware, insurance is not retrospective. If something bad happens, we can’t go back in time and take out a policy.
For me, I would consider the need for insurance (or otherwise), depending on the choices I’m about to make in the short and near term. And for those events that we have no say in (“That tree falling on your house? That was just bad luck”) – I suppose it depends on one’s risk tolerance – like every other investment decision.
Thank you again for the post.
Cheers
Thanks for the thoughtful comment V!
I’ll try to answer the points you raised.
– At this point, I can’t see us getting health insurance, it seems to be getting more unattractive as time goes on. Prices rising strongly, complicated as hell, great new public hospitals. I’m not sure if this will change in the future, maybe.
– For 2-3 surgeries in the very near future, it would be too late for insurance because they’d be termed existing issues I believe which wouldn’t be covered. My thinking is basically, if it’s an emergency it’s free (public), if it’s needed but bearable in short term (knee or shoulder issues to fix), I’ll wait on the public list, and if it’s unbearable we’ll pay to have the issue fixed.
– Didn’t cover travel insurance, post was too long already! I actually think this one has value, because the cost is absolutely astronomical for some cases, but haven’t looked into it much as we do local travel these days. And yes the treatment in some countries will be bad compared to here. Does insurance pay to fly you home for treatment??
– It certainly is about managing risks over time, you’re right. And I did say everyone needs to decide for themselves. Hopefully nobody is just blindly following what I’m doing, just as they shouldn’t blindly follow what anyone does!
– Great point, risk tolerance is different for everyone, that’s why insurance is not approached rationally. And that’s perfectly ok, I mean, we all need to be able to sleep well at night!
Thanks again for the great comment 🙂
Wow, reading this article as a german makes me feel really embarrassed!
We germans love insurances!!!! I still have a ton of them although we moved to Perth in 2016:
Pension insurance (three of them, very dumb, but I was 20 when I bought them, paying for 2 of them)
Private Health (we applied for PR but our 457 visa does not allow us to have no insurance which is good)
Car insurance
Disablility insurance
life insurance included in Super
Pension insurance:
Probably this was a mistake… paying $175 per month. I really want to get rid of it but I think its better to keep it, now that I have already paid 13 years into it. It also does not give me any tax benefits. I wish I would have known about ETFs when I was 20. From 2050 on they will pay me 1100€ (1725$) monthly until I die (could be more or less depending how the market is).
Private Health:
paying 91$ per fornight for a couple (as we cannot have Medicare). Never realised how expensive everything is. In Germany I used to go for free to the dentist, got my teeth grinding retainer for free, doctors appointment was free, did not matter what kind of doctor or hospital. Also my mums cancer treatment was free. Now I have to pay minimum 62$ for each appointment, getting 37.05$ back. I guess it makes sense because the price for the german medicare was 15.5% of the salary (7.3% of this paid be employer) so this private insurance is much cheaper for us at the moment.
Car insurance:
Did not understand it for a year – I only paid the compulsory 3rd party until someone told me I would have to pay if I damage somebodies car or property. whoops. now I pay 179 +500$ excess per year, however I did not insure my vehicle as it only costs 750$. In Germany I used to pay 550$ per year.
Disability insurance:
paying 100$ per month for getting 3000$ in case I cannot work anymore. They also have to pay if I can work in another job. Still do not know if it makes sense but hey.
Life insurance:
feel like I do not need it as we do not have kids and I could somehow survive on my own. however it is included in super so I am too lazy to stop it. And we are planning kids in the next years.
The only insurance I really would like to have is something called “Haftpflichtversicherung”, basically third party for yourself. It covers you for example if you injure somebody accidentally (coverage up to 10million), lose the keys of your company, help your friend moving and drop his expensive TV, your flower box falls from the balcony and destroys the roof of a garage (this happened to me). It is not avaliable here I think.
Also I feel the health insurance for traveling is so expensive!!!!! I used to pay 7.50€ (12$) for 6 weeks per year! Why is it so expensive? At the moment we use our creditcard for this.
Uh and for a while we had a “law insurance” when we were renting our apartment because renters are CRAZY!! It was really helpful for us.
So, I feel I need nearly all of the insurances you mentioned in your article (except the insurance for stuff in the house, we do not have a pet so I do not need pet insurance, and life insurance (no kids)).
I discovered your blog recently by the way and think it is great!
Welcome Viola! Thanks for sharing your thoughts.
Don’t be embarrassed at all, everyone has to decide what’s right for them and the amount of insurance they feel comfortable with.
Sounds like you’ve found the right balance for you which is great. Just make sure to regularly look for better deals otherwise your provider will milk you for more money hoping you won’t leave 🙂
Thanks for reading!
Hi SMA,
I’ve been voraciously reading your blog since hearing your podcast on Aussie Firebug. I understand your reasoning behind your insurance decisions but feel compelled to comment so to add a different perspective from someone who has two small children to raise as that changes things significantly!
We are still in the wealth building stage of our lives with FI still a long way away unfortunately. The four pillars of personal insurance: Life, Total and Permanent Disability, Income protection and Trauma are all important using the right combination. Statistically when you’re young you are more likely to claim on Trauma or Income Protection insurance so for us in our 30’s it’s more important to have adequate cover for those two. If I’m working so hard to make money I sure as hell want to protect my ability to make it. We self insure for smaller expenses like pets and new car (have 3rd party) but if you’re off work for a few years due to cancer treatment then 6 months of savings doesn’t take you very far. Plus when one partner is sick the other partner is likely to need time off to look after them and need to get help looking after kids as well. We are lucky we have family nearby but others may not and I wouldn’t want to be a burden on our families either and screw up their hard earned retirements. Life and TPD insurance we also have a decent amount for although we have significant equity in our properties and could sell them if need be I would prefer not to and happy to pay the premiums for now. We have spent the last 10 years working our asses off and living frugally to build our assets, building our careers and playing good offence. I think it is equally important to play good defence by having appropriate insurances in place to protect that.
Our life, IP, TPD and Trauma insurances alone total nearly $8k p.a. (Excl tax benefit from IP). Sounds crazy I know but it’s only high for the next 9 nears til our youngest is in high school. Then our mortgage should be significantly less (or gone) and the kids can get themselves to and from school without requiring the help of an adult.. Hope this helps some other poor parents thinking ‘shit I’m paying so much for insurances each month’ 🙂 My partner doesn’t believe in insurances and I pay all of his out of my pay cos I’m the one thats screwed if he dies or becomes permanently disabled (even though his mums first husband died)!!!
I also know people close to me that have had to claim on their insurances and they were pretty friggin happy they had it in place. 1. My mother in law’s first hubby was killed in car accident leaving her with 2yo and 4yo to raise but luckily he had life insurance and she was able to buy a house and survive 2. Friend had breast cancer at 32 and was self employed, had IP insurance which paid her out while she was off work for 2 years. 3. Friend from work had bowel cancer at 35 and had a couple years off work and had IP in place, also had to pay to freeze eggs due to chemo. 4. Sad story warning: Friend’s sister’s husband suddenly passed away a few weeks ago leaving wife and two small children. Had been saving up a deposit forever and only just taken out a mortgage 5 months ago when he died suddenly. NO LIFE INSURANCE and now his wife will probably lose their home. Very very sad. Anyway end of my ramble but I hope this may help someone as it’s an important topic to think about.
Wealth building life stage = insurance important.
FI stage = be more discerning and do away with some insurances.
Keep up the good work!
Whysee, thanks for sharing your thoughts, much appreciated! And welcome 🙂
As I said insurance is quite personal and everyone will come to their own conclusion on what’s best for them. Given that most people have TPD/Life insurance in their super, sometimes with income protection too, then this is usually covered unless people opt out of it. That’s my understanding anyway! Best insured inside super as it’s more tax-effective and doesn’t affect savings rate for FI.
You rightly point out that things are more complicated once you have kids, more insurance is generally better unless one has family to help – many do and consider the role of family is to help each other.
I understand your desire to not use your wealth as an insurance in itself, it makes sense. I just see it as in that’s what wealth is for if need be, and that we’d find a way through whatever happened.
Nobody can argue with certain stories where no insurance has crippled people financially. But I don’t equate that to all insurance, all the time, for everyone…as some people do.
Thanks for reading and providing a great comment on the topic! I think we understand each other and just come away with a slightly different approach 🙂
Gosh, finally reached an article I don’t fully agree with.
House and contents — considering the amount of value that is being insured against in home and contents insurance, the actual cost of the insurance is remarkably low. The chances of a catastrophic loss of home and contents might be low but the impact of that on your finances is still significant, even if you’re a millionaire. I wouldn’t be comfortable forgoing this unless my passive income or growth from my portfolio was higher than the cost of getting another house… and that would need a heck of large portfolio
Car: I agree that after a certain point of FI you can afford to self insure your car. Paying 5000 bucks every 5 years vs perhaps needing to pay 5000 bucks one off for an incident seems a bit of a no brainer. But I disagree about not having ANY car insurance – third party cover at least is important to have and again is relatively cheap. Other peoples car costs can be expensive! (I recently had my car fixed by my insurer for a repair valued at 9 grand and I only had the 550 dollar excess to pay). Though I also will never match you on the fundamentals of not being a frequent driver of cars anyway 😛
Contents: people insure cotton buds? WTF? But it depends so much on what your contents actually are. One of my friends lost quite a lot of gold and jewellery a few years back – well worth the cost of insuring that amount of value imo. But cotton buds??? What???
Health: Basic health cover is essential for people earning a decent income, purely from the point of view of the medicare levy surcharge. But also as a doctor I actually realise the real benefits of access to private health care rather than public when honestly the wait times and care in public hospitals can be horrific. Private cover is so much better for orthopaedics, obstetrics and oncology care. Although again yes, once you reach a certain level of FI you can afford to self insure for these things… but don’t discount the positives of having the insurance when you’re young. (I do agree that extras cover is an absolute waste of money). Also if you do the maths on the tax benefits, the threshold at which the cost of the (cheap and dirty minimum hospital cover) combined with the low income insurance rebate is lower than your tax burden of medicare levy surcharge would be is right there at the bottom of the threshold that you start paying medicare levy surcharge.
Life: Only relevant when there are dependants involved, yes. But still worth having in the period while on the road towards financial independence. NOT worth having whole life insurance.
You also missed another one – income protection insurance. Again not important once you’re financially independent and not working a normal job. But it is important to have a safety net while in the building stages. The main mistake people make here though is insuring their income and not their expenses.
I wasn’t trying to cover every insurance, that wasn’t the idea, just an overview of how I personally think about this stuff.
Thanks for your thoughts – seems we mostly agree but have a different take on some things.
A bit late to the party here :-). Insurance is exactly the same as portfolio theory. When you invest in a well diversified portfolio you average out the risk across many different stocks. This is exactly the same as with insurance – you can think of your life trajectory as picking a particular stock.
Take driving for example. There is some inherent risk with driving – most of the time it will be fine but sometimes it will lead to an accident. There will be some probability of having an accident and suffering a loss. Taking out driving insurance smoothes out the risk so that the probability of hitting the extremes is lowered.
You could make the same argument against diversification of portfolio – there is no point in investing in an LIC or ETF because the probability of gain is, on average, going to be the same as the market minus overheads. So instead you would pick 1 or 2 stocks put your entire savings in them and take your chances. You would not have to pay the LIC management fees. It is exactly the same logic. True that mathematically you will come out ahead (no middleman) but because you do not diversify there is much more variance with your particular stocks leading to wilder fluctuations in the final outcome.
Insurance is exactly the same – probability wise you are correct – if you could live your life 100 times then maybe 1 or 2 times no terrible things will happen and you end up saving your premiums. But you dont know in advance which life you will live :-). So without insurance (which “diversifies” your trajectory) there is a small chance that very bad outcome (so called black swan events) will hit you.
From a statistical point of view your expected outcome is your long term average, and your variance is related to how like each trial will deviate from that. Insurance reduces the variance (for a premium of course), so you can be more confident that your particular live will follow the expected average more closely (you explained it well above with how the premiums are calculated).
This is why to me it is a logical contradiction to argue for diversified portfolio on one hand and self insurance on the other hand. Mathematically both models are the same – just a way to diversify probabilities.
Just like with LICs though, insurances do vary and some present better value than others – so I do agree one needs to think a lot about it – but do recognize the advantages of the model and the roll it plays in a balanced portfolio.
Thanks for the comment Mike. Everyone should definitely think about it, which is really the point of my point as most people don’t question it – they just assume having insurance is always better. And yes of course, insurance smooths things out and covers against huge potential costs – that’s its value and why people like it. Totally agree with that.
Interesting to mention the comparison to a portfolio. I don’t agree with that at all. In fact, I see it the opposite. By avoiding most insurance, and investing in an index fund for example, you’re putting the overwhelming probabilities ON YOUR SIDE, provided you can afford to pay for accident costs when they happen, which not everyone can.
By investing in one or two stocks, the outcome is so overwhelmingly tilted AGAINST YOU, because of the positive skew of market returns which I wrote about here. That is, you typically achieve higher returns by adding more stocks to a portfolio, not less (as you’re more likely to hold the massive long term winners which drive the market’s gains).
I get what you’re saying, but the thing is diversifying with stocks has a positive influence on the outcome (it’s likely a winning bet) and insurance is likely to be a negative influence on the outcome (a losing bet), so that’s where it separates for me. Maybe I have a different risk tolerance to others, but that’s part of my point. The fear around these things is irrational much of the time and many people can actually afford to hold little insurance and even if something happens they’ll be fine, albeit with a dent in their net worth.
Having a diversified portfolio and having little insurance are both playing the odds. It’s just that those long term odds are extremely favourable compared to loading up on every possible insurance and investing in 1 or 2 stocks. 🙂
Totally agree that loading up on unnecessary insurance is suboptimal and there is definitely a place for self insurance – as you described in insuring your own property there is little value in it as you can just buy new property anyway.
It is the legal risk that is most important – as mentioned in this thread, if your car hits a commercial vehicle (they can be **much** more expensive than a sport car!), you could be out easily 100k+. For the sake of a couple hundred bucks a year it just does not make sense to take this risk.
Probability is about expected outcomes and therefore expected losses (if the probability of hitting that porsche is 0.1% and it would cost 100k then a premium of $100 is fair). It’s just about judging those probabilities and making the call – and also as you mention risk tolerance – how would you feel personally if you happened to be in the 0.1% and suffered such a $100k loss which could have been avoided by spending $100? Our mind does not work in probabilities well :-). Peace of mind helps us plan for the future as well.
I have seen insurance described recently in an article as an economic service – insurance frees up capital so it can be invested more productively. The argument was that if everyone self insured they would have to set aside a considerable amount to handle the unexpected (or at least have that money in liquid assets) – which is exactly what you claim above. But this money is better invested in a way that creates better return. It may be that when you hit that porsche the market is actually down and when you liquidate to pay for it your portfolio will suffer more than the value of the loss! (or there may be tax consequences if you have to sell 100k of shares to cover that porsche). Insurance frees your capital to be deployed better.
All good points Mike. I guess that those probabilities are calculated as part of the insurance and I’m happy to pay multiple hundred thousands if something unimaginable happens because the risk is so infinitesimally small that I’m okay with that risk (would actually be interesting to see it precisely in number form 0.001% or something?). If it happens I’ll be content with the fact that although it sucks, the probabilities were still on my side so it was a sensible and rational choice.
Definitely something in the peace of mind factor as you say. Probably depends on the level of fear one has around these issues too. If insuring gets rid of that fear and allows a more peaceful life then it’s totally worth it. Maybe I’m just a reckless outlier lol.
Again it’s back to more probabilities that the market will be down when the time comes to cash out and cover a hiccup. And we know that most years the market is up, so again that’s unlikely and would have had many years of compounding those ‘insurance’ payments in the meantime.
I suppose we can meet in the middle and say some insurance makes sense some of the time. And that it’s essentially a personal choice.
The argument about freeing up capital is more related to businesses. Hard to compare businesses and people with regards to insurance policies as possible business liabilities are way outside the realm of what we would experience. That would be factored into the price obviously and helps businesses avoid holding huge amounts of cash or otherwise avoid going bankrupt in an event. We’re lucky in the sense that we can just load up our ‘premiums’ into diversified share exposure for it to compound and outpace the value of our expected return on any insurance. Businesses won’t be doing that for a number of reasons. Buffett does to some extent (invests premiums to be paid out later) and that model has worked incredibly well. Not saying it’s quite the same thing tho, just interesting to note.
I’m with you Dave – I’m not a fan of insurance – or the fear tax as I call it.
I do have basic hospital cover, as this one saves me tax.
I have to have building insurance on my IP, though I let lapse a couple of years. I found out well after the fact from the tenant that a lightning bolt had hit the house – and that started me thinking that could have been a burn down disaster! Plus I have to have it to fulfil the terms of my loan.
I got coerced by a “financial advisor” to have Income protection, on year 2 the subs skyrocketed 30% to $1600 a year. I cancelled immediately. It just isn’t worth it to me. I have large savings and little outgoings. And the likelihood of a sickness that bad is low. $1600 a year is a lot of money.
I am 41 now, had I had all these insurances for say 10 years you’re looking at more than 20k just gone into thin air.
I was in a similar insurance or not argument (heated convo) just recently. Because of that I did some research on TPD. 0.2% of those insured claimed in 2019, of those only 65% actually got their payout….
The data just doesn’t add up to me.
Thanks for sharing PB. It’s amazing how fast some of the premiums rise! We had the same thing with our pet insurance and also one building insurance (hiking by 20% per year or more).
We do have insurance policies on our rental properties because the cost of 1 or 2 burning down would be too much to stomach. But yeah the industry doesn’t do itself any favours – their job is really to pay out as little as possible and they seem to do a decent job of that. So I think it’s safer to self-insure once you’re in the position where you can afford it.
And even if the worst case scenario happens, the self-insured person would burn through all savings and wealth and if they got sick they’d end up on govt assistance anyway, which is exactly what its there for. I’m happy to pay taxes for safety nets like this. There’s a moral issue obviously that people bring up where if someone has no savings/wealth and no insurance then taxpayers are bailing them out all the time. But I feel that’s a different argument to someone who will self-insure up to a point. After all, there’s barely a limit to the amount of insurance we can take on and all the risks we want to ‘protect’ against.
Very interesting post and fascinating comments thread. So many different opinions!
I took out hospital only health insurance as a single person once the premiums were cheaper than the Medicare surcharge for not having it. Once I got married, I ditched it as it wasn’t saving me money anymore. We’re happy with the public system for now. We can always take it out later as we get older – we’d pay a higher premium each year than if we’d held it since we were 30, but be paying for so many years less than it should be cheaper overall, and well hopefully have more funds available by then too. Personally, I hate the idea of paying for Medicare, and private health insurance and then the gap and all the other things (like anaesthetics) that private health doesn’t cover. It’s like paying 3 times!
Extras cover isn’t worth it – we just pay the dental bills when needed and were definitely in front without it.
We do have just ambulance insurance but could probably lose that as our savings increase. It’s $120 a year for the whole family so not going to save us a lot when we ditch it. I never used it as a single, but since having kids we’ve used it twice so in the last 5 years we are in front!
Building insurance is mandatory while we have a mortgage, and I doubt we’ll ever be wealthy enough to feel comfortable self-insuring for total loss of our house! The premiums are expensive but the rare chance of loss would be catastrophic financially without insurance. We do have the excess set to $5k as we can cover any little things ourselves – only insuring for big stuff and happy to pay in the hope that we never need to claim. Be nicer if the premiums weren’t quite so high though!
I have always had comprehensive car insurance as well as CTP. I could possibly ditch the comprehensive on our older cheaper family car next time renewal comes around. Insurance on the little runabout car we drive to work is actually cheaper than the family car (newer, smaller, better safety features) and includes new for old replacement for another year. Maybe when the replacement value falls below <$10k I could consider dropping the comprehensive there too. I think I would still want third party property if I didn't have comprehensive just in case I was involved in an accident with that elusive Ferrari everyone keeps talking about! I have looked into third party property only before and the savings we're minimal at the time.
We do have contents insurance, rolled into our building insurance, again with a higher than standard excess.
And we both have Death and TPD insurance in super which is important while we have young children. Hubby has income protection too, but I don't. I've been with the same employer for over 20 years and have an incredible amount of sick leave and long service leave available so figure that's my insurance policy for now ????
We've never even considered trauma insurance, but I do have a friend with it who got breast cancer at 32 and her trauma insurance payout was enough to pay off her mortgage so she didn't have to worry about that expense while she recovered.
We don't have any pets, but would always buy travel insurance if we went overseas – not if travelling in Australia though. We'd just wear the loss/extra cost if something went wrong. I think some travel insurance comes when buying travel products on our credit card anyway, but I've never looked into the details.
My biggest problem with insurance is understanding what I'm insured for and what I'm not, and what loopholes there are for the insurer to get out of paying. And then how to compare policies from different insurers.not just on price but on coverage/value. They make it super hard and confusing deliberately! So I just stay with the same mob I've always been with and *hope* I'm not being ripped off too much. Not a great FI strategy, but it's just.too.hard.
Love your thinking Dave. I happen to be an Actuary myself, I help the company to price its insurance correctly so that the company still wins after paying out claims. One thing to note is Insurance company don’t always win though… , eg. in the bushfire event 2019/2020, stormhail events almost every year, and those large flood events that happen every now and then. Insurance companies in those years would lose out and pay out more in claims than premium collected
I think there are always two school of thoughts when it comes to insurance. However I would strongly recommend all readers to understand their own circumstances before making any financial decision. Author’s example on pet insurance is interesting as he thinks the math works out for him.
Likewise, in the case of home insurance, the math may work out well for someone who lives close to coast, storm hail prone areas, or even next to bushes.
For Health insurance, the math will work out for some who is looking to get an elective surgery done in the future.
For car insurance, the math will not work out if you follow frugal car ownership principles and you drive much less than general public. Although I would say a cheap third party insurance offers massive peace of mind
For life insurance, you don’t want to over cover more than the sums insured to cover any mortgage you have or to cover the minimal living expenses needed that would otherwise put your family in bad shape…
I like Author’s idea and his math games. It all makes sense to him because he assessed his situation and knows what he is doing. May not apply t all readers though
Thanks for your thoughtful comment Daz, great to hear from someone on the inside of this industry!
You’re totally right, insurers don’t always win so it’s hardly that black-and-white as I’ve suggested. But I’m glad you appreciate my point of view and the math games, even though everyone needs to carefully think about it for themselves (which is really the point of the article – thinking about it rather than just assuming insurance is always a good idea).
Interestingly, we’ve now cancelled the pet insurance as the premiums have gotten so high that it can’t be justified anymore and I think it’s no longer a winning bet.
Hi Dave, I used to have similar views to you on insurance (eg self fund using savings to a large extent) but since my wife and I lost everything we own to the 2020 bushfires, I would definitely recommend having home and content insurance. I actually canceled my home insurance in mid 2019 then got cold feet and partially insured my place for $300,000. However my rebuild costs for a self designed (very modest) 2 bedroom home is now at $450,000 (not $300,000) not to mention costs associated with a new Council stipulated septic system, site surveys, new carport, water tanks, tools, groundworks, electrical connections etc ($100,000 ) let alone the costs of clean up, establishment of gardens and general landscaping. Climate change and poor land management practices will increase the risk of high energy catastrophic events in the future for many more Australians than were affected last time. Also, I have had to rely on the public liability component of my home contents insurance to fend off law suits (a unlicensed worker who had an accident whilst on m6 property) on 2 separate occasions. However, in future, I will use an insurance broker to tailor my needs rather than an off the shelf insurance product. Thanks for your wonderful site! Regards Jimmy.