There is a fine line between not having enough insurance and being over insured. After all, you can take out insurance against almost anything these days. If you take out all of these policies, you will soon find all of your money going on premiums and not enough money to spend on living. So, today I will look at how much insurance do you actually need.
When doing so, we look at 5 different areas:
First of all, how likely is it that it’s going to happen. We all gets colds and flus. Washing machines break down all the time. With the invention of smart phones, we are all suddenly walking around with €500 mini computers in our pockets; a prime target for pick pockets.
Then there is sickness and premature death. A 45 year old only has a 0.2% chance that he won’t see 46. There are 30,000 cases of cancer in Ireland each year, something that is growing all the time.
How much can you control the risks that you are exposed to. Remember anyone can get in an accident at any time and it may not necessarily be your fault. You can reduce the risk of some things happening but not everything, especially if a third party may cause it.
What is the impact it will have on not only your life but the lives of your family. While a 45 year old has only a 0.2% of not seeing age 46, the impact of that early death would be huge. But if you get a flu or the washing machine breaks down, it will be little more than an inconvenience.
If you get a flu, you might be out of work for a day or two. If you get cancer or have a stroke, you may never work again. If you make up that 0.2% of 45 year olds who never see another birthday, what will the impact be on those you leave behind?
Are you able to adjust your lifestyle to cater for this change in your life? Can you adjust your spending habits accordingly and for how long? If you have to get a new washing machine, you may forgo a few nights out to pay for it. What if you are long term unemployed? How would you survive without an income? Or what if the main earner in a family died? Is the widow’s pension enough to live on?
What solutions are available to you to prepare for the risks that you find are uncontrollable and will have a high impact that you cannot work around.
There are clearly instances where the likelihood of the event happening is very high but the impact is low and it is easy to work around the impact. The higher the impact though, the higher the need to protect against it. In some cases, such as a home appliance breaking down, using your emergency fund is an adequate form of protection. In other, such as long term illness or premature death, it is quicker and cheaper to to insure against the risk. Ultimately, you need need a mix of all three.