January 1, 2003

Insurance
by Marcel Chartier

Insurance is a strange beast. Insurance companies have products for every pallet, every nuance, every phobia we have. There are so many variations in insurance policies, or none at all, depending on what you want insured. Many people don’t have insurance, and when people get insurance it is amazing on how many people overspend. We get insurance on the dumbest things, like vacuums or printers, but don’t get disability insurance when we should. We insure ourselves for huge amounts of money when we don’t have too. Why? The reason for insurance is misunderstood, the cost is underestimated, and the insurance industry panders to our wants and fears wonderfully. Lastly, we pay what they ask, generally with less comparison shopping than we do for a pair of shoes.

Well, what is insurance for? The dictionary says “insuring against loss, a system of protection against loss”. Does it say protects against all loss? No. Does it say a form of investment? No.

Once you get what insurance is really for, which is to protect against significant loss, not cover all losses you:

a) don’t expect insurance to cover all your losses.

b) don’t expect insurance to eventually cover what investments should be used for - achieving financial independence.

Lets get into some examples, the first is unnecessary insurance - appliance and electronics insurance. How many times have I been called/asked to buy additional insurance for my vacuum - lots. Why would I buy an additional $120.00 extended warrantee insurance on a 1-2 year old vacuum that cost me $280 (CAN) dollars? I don’t know, but people buy this type of insurance in droves and generate huge profits for retail companies. It’s perception, the pitch is we will replace the product for a newer one if it breaks, and after forking out $280 dollars that sounds like a good idea. What they forget to tell you is that the odds are the products sold will not break in the time allotted in the warrantee, as past insurance studies have proven that, and if your vacuum hose or whatever does break, the replacement cost is about the same or less than the warrantee. Actually, by the time the vacuum breaks, you probably will want a new on with all the new features - well after the warrantee expires. If you do have to go out and buy a new vacuum at $280 dollars, your loss is $160 dollars (280 minus what you would have spent on the warrantee) . Do you really want insurance for $120? Take a chance. This is a reasonable risk.

Second example: life insurance as an investment vehicle is only worthwhile if you are already wealthy, as the income is taxed at a lower rate when you collect. When you are coping with a mortgage and family - forget it. Get term life insurance and put the difference into your RRSPs (Registered Retirement Savings Plans) . Why? Guess how the insurance company is making money off your investment life insurance policy? They are investing in the markets (like you would with RRSPs) and are making more than they are paying you and pocketing the difference. Just buy the insurance you need in order to cover the costs that you or your spouse would incur if you or your spouse passed away. Figure out what amount would enable your spouse and family to set themselves up well without you, pay for the kids education, add to your spouse’s investments. If she/he works, then you don’t have to replace their income, just a reasonable amount of yours. The more you are worth, the less you really need life insurance. The older you are the less you need life insurance, as you should have independent children, investments, and a paid home. What would life insurance be for, additional income? Put the money to work directly into mutual funds/good stocks and bonds and generate investment income with fewer strings attached.

Car insurance - only cover what you need. Do you know how much your vehicle is worth right now? Insure it for that. My example: a few years ago I was looking at my insurance costs for my car - a 14 year old piece of crap, with 300,000 km on it - but it runs and gets me from A to B. I had collision, comprehensive, some extra coverage. Easy to get into this type of insurance situation as it was appropriate in the past. A few years ago I stumbled across the estimate as to what the insurance company would give me for my car, and what it was valued at - between $700-1200 dollars, depending on its shape and mileage (once over 100,000 km value drops fast). For my car it had to be closer to $700 than $1200. Again, as in the vacuum cleaner example above, I realized it was foolish to put anything more that was legally required, or prudent, for my vehicle. I dropped the collision, upped my deductable coverage to the maximum. I have saved more than the maximum value of my vehicle over the past two years of doing this.

The rules for insurance:

1) insurance will not cover everything - so assume that, and insure yourself by assuming the cost of the higher insurance deductable by having a reserved amount in a savings or money market account. Factor that amount in your insurance planning. If you have a $1000.00 available to cover higher deductable limits, where the insurance premiums savings are significant, you can save a lot of money over time as those premium savings multiply over time.

2) Play the odds. It is unlikely your vacuum, house and/or car deductibles will be required at the same time. One account covering the highest policy deductable plus 25% is OK to cover all policy deductibles.

3) The reason for insurance is to reduce losses. Review the value of what you are insuring. Adjust coverage to reflect the value of what is being covered. Make sure the insurance fits your needs and no more.

4) Shop around. Insurance premiums can vary significantly. When I last looked for life insurance the range of monthly amount for the same coverage for me ranged from a low of $17 to over $80 a month depending on the insurance company. That is a huge difference in cost over a five or ten year policy.