Sunday Independent: Weigh up the cost of insurance

This is a piece we wrote for the Sunday Independent (originally appeared on the 4th of May).

We buy insurance to protect something we own or value. When asked, ‘What is your greatest asset?’ many people will say their family home; the more enlightened might say it’s their health.

Wealth is clearly something which many of us value – however, some people incorrectly mistake their income for wealth.

Cashflow can have endless liabilities stacked against it, which is why believing a person making six figures is ‘wealthy’ is often wrong – when viewed in the totality of their financial position.

Assets minus liabilities equals wealth – that’s a basic accounting equation.

It’s important to have a good understanding of wealth and of what you value before buying insurance. You should also ask yourself if the insurance in question is worthwhile.

The principle of indemnity is that you can’t be insured beyond the loss you experience, and there is always the issue of the cost of insurance versus the risk of the event.

If your home is your most valuable asset, home insurance is vital as it should cover you for the cost of rebuilding your home, should the worst happen. Pay attention to the excesses (the first part of a claim you must pay for yourself) and the conditions of your cover, however, otherwise your policy could be worthless.

Death is a popular instant wealth killer that people insure against – that’s what life insurance is for. That the average life insurance payout in Ireland is less than €50,000 also shows that we probably undervalue ourselves – at least when it comes to indemnifying against it.

While death is guaranteed (along with taxes), it is a single event in our lives. However, illness can crop up many times and is far more common.

Some insurance, such as specified illness cover, pays a lump sum if you have a heart attack, stroke or cancer, but their terms are so strict you need to be near death to cash in the claim.

This is why income protection should be more popular – it allows you to insure up to 75 per cent of your future cash flows (or income) up to your retirement age. It pays out a regular cash payment that replaces part of your lost income if you can’t work due to illness or disability.

You can get tax relief on your income protection premiums at your highest rate of tax – up to a yearly limit of 10 per cent of your total income. This can make your premiums more affordable, although you will have to pay tax on any claim payout received.

Income protection is worth having when it comes to the risk and reward of it because it indemnifies all future earnings. It’s also hard to get (like any insurance worth a damn) because entry requirements are rigid and discriminate based on your job.

How the insurance industry sells so much cover that is virtually unclaimable or not fit for purpose when gauged against the most likely risks that people face is not an indictment alone of the sellers, it’s also a fundamental misunderstanding by consumers of what risk is, what it affects and how.

We need more financial education in schools for this very reason. Lack of it aids bad decision making and ensures lots of gullible buyers are constantly fooled. The beneficiaries of this are not the ones who carry the cost of it!

Karl Deeter is compliance manager with Irish Mortgage Brokers

Sunday Indo Business

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