How to save money on your personal insurance… and get more value

Is insurance a waste of money if you never need to make a claim? What about a situation where someone has no cover, acknowledges that they need some cover but procrastinate about getting cover organised. A year goes by and they still don’t have cover but also they haven’t needed to make a claim so they think to themselves that they have at least saved on one year’s premium by delaying.

I met someone recently that said they don’t have car insurance and that they have saved a bit of money over the years… This person was not in a position to cover the loss of a car. He viewed the outcome of his decision as “making a saving”, I viewed it as taking a dumb risk. It’s tantamount to gambling. Essentially, he’s upside is saving maybe a thousand bucks a year at best. His downside is losing tens of thousands of dollars and not having a car!

That said, car insurance is expensive compared to income replacement insurance. Consider the situation of insuring $100,000 p.a. of income for a 40 year old male until the age of 65. The premium is approximately (after tax) $1,100 p.a. to essentially insure a 25 year income stream of $100,000 p.a. – a total possible benefit amount of $2,500,000!… whereas it costs approximately $800 p.a. to insure an $80,000 car. Arguably, you should cancel your car insurance and instead spend the money on income replacement (said in jest of course).

Not only does protecting your family and yourself provides a certain amount of “sleep at night” factor but it’s just good business.

But what if you can’t afford full cover or you can’t get your head around spending that much money? We’ll the answer is probably not back and white i.e. full cover versus no cover at all. Better to have some level of cover (even if you acknowledge you are underinsured) than zero cover. Here are a couple of things you can do to reduce the cost of income replacement insurance:

  • Wait period – the wait period is how long you are off work for until you are entitled to claim a benefit. There are plenty of options including 1, 2, 3, 6, 12 and 24 months. The longer the wait period, the lower the premium (but you accept more risk). For example, extending the wait period from 30 days to 1 year reducing the premium from $1,100 to $590 p.a.
  • Benefit amount – if you can’t afford to insure your whole income, insure part of it. For example, insuring $60,000 (instead of $100k) with 1 year wait will cost only $380 p.a. That is easily affordable.
  • Super then top up cover – it is possible to get some basic shorter term cover (2 years) via super and then compliment it with better quality product with a 2 years wait. In this situation you would first claim on your superannuation policy for the first 2 years and then your other (better quality) policy would kick in.

Insurance is all about balancing: 1) the quantum of cover 2) the quality of the product and 3) the cost. Our role as an advisor is to help you discover how much insurance you are comfortable with. Some people want more cover than others – it often comes down to a personal choice.