Business

Five Reasons Why Insurance Matters

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Don’t blow off insurance. Here are my five reasons why it matters.

1. Profit, Not Prophet

Insurance is essentially protection. By making a certain (relatively) small payment you buy the right to claim a much bigger sum to cover a potential loss. You can get insurance for everything – you can even self-insure if you have enough money saved. Unless you can predict the future, you need it.

2. Spread the Risk

Insurance works by spreading the risks that all of us face – car accident, house fire, robbery etc. over a bigger pool of people. For example – of the 17 million odd motor vehicles registered in Australia in 2014, about 600,000 were involved in accidents. That means for every 100 car owners, 3.5 of them would have an unexpected expense. If an accident costs $10,000 on average to fix, then the $35,000 needed for those repairs can be covered by 100 people each paying $350 a year.

3. No Assets – No Worries?

You need to consider more than physical assets when you are thinking about protection. The best asset you have might very well be your ability to work. To replicate the average annual wage of $74,000 odd a year, you would need to have more than $2.5 million in a term deposit paying a generous 3 percent. That’s where protecting your earning power through accident and TPD insurance makes sense.

4. Savings Destruction

Nothing destroys a saving plan more than unexpected events. That’s why you need a cash contingency but you also need to use the principle in point two above to spread your risk over. Taking out insurance actually gives you a better ability to save and plan because it removes the need for you to keep a larger contingency in ready cash and put more in longer term savings.

5. Shop Around

Just like any financial product, it pays to shop around in insurance. For example – there’s no point paying to protect risks you don’t take. But it isn’t just about cost. You need to compare what an insurance product covers and what is excluded. Cheaper policies may end up excluding the very risk you are taking. It’s also important to check if there are additional benefits offered by a policy. ASIC has useful tools to help with comparisons.

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