We have cancelled another insurance policy
14 Aug, 2022
Back in June of 2017, I wrote a blog post called Insurance (YAWN), and in it, I talked about what insurance we had and what policies we were dropping because we had reached a point where we could self-insure. It was pretty interesting to re-read that post because, at that time, we were paying a total in premiums of $7,425 per year, or $143 per week. Given our incomes, that was a lot of money. But it was not just about the money we were spending; I had worked out that we had become overinsured for our needs.
Over the years, we have had the following personal cover:
House insurance
Contents insurance
Car insurance x 2 cars
Health insurance x 3 people
Trauma cover x 3 people
Life insurance x 3 people
Income protection x 2 people
We have since dropped all of our life and income protection insurance and, more recently, have cancelled our trauma insurance.
This blog post is a quick insurance update to explain why we continue to shed insurance policies and show you that it's worth reviewing your insurance from time to time and whether the cover you have is appropriate for your current life stage.
In that original blog post, I used this running/insurance analogy, and with a bit of editing, I think it stands the test of time:
Alexandra is known for its icy winters. If I want to get out for a run, I need to layer up for some protection from the elements.
I’ll wear two merino long-sleeved tops, leggings, a warm hat, warm gloves, thicker socks AND gaiters to stop cold air and pebbles getting in around the tops of my shoes. And I take my beautiful dog Blue for additional protection.
I have to wear so much because my body is too cold at the start of a run to look after itself and keep me warm. I need additional protection/insurance against the cold.
But the further I run, the warmer I get, and bit by bit, I get warm enough to start peeling off the layers.
First, off comes a top, 10 minutes later, off with my gloves, and 5 minutes later, my hat.
Finally, I have a comfortable layer of clothing to continue running in.
Insurance is like that.
You need to protect yourself with a certain level of cover, but as your situation changes, you may need to remove some.
There will always be a baseline level of clothing/insurance that you must keep.
The years tick on, and as they do so, we no longer need the insurance that was essential at the time we took it on.
From our original list of things we have insured, I’ve been able to shed a few policies and their premiums, and this is what now remains:
House insurance
Contents insurance
Car insurance x 2
Health insurance x 3 - This is next on my list to go
Trauma cover x 3 - Cancelled in July 2022
Life insurance x 3 - Cancelled a few years ago
Income protection x 2 - Cancelled a few years ago
While we will always take out insurance on our home, contents and cars, in July, we dropped our trauma cover, and I’ll explain why we felt comfortable with that decision.
Premium Creep
The monthly premium has been increasing yearly. PocketSmith showed me my exact annual spending.
Trauma cover annual premiums for Jonny, myself and our daughter:
2019 - $2190 ($182 per month)
2020 - $2435 ($203 per month)
2021 - $2700 ($225 per month)
This year it was on track to cost us $2,892 ($241 per month)
Jonny and I have different providers, and each has a differing sum insured due to age and health, ranging from $150,000 to $180,000. Each year we absorbed these increases into our monthly budget because we needed to keep the protection the policy gave us. More recently, as our financial situation has strengthened, I realised we no longer need this cover. We would be financially OK without it if some trauma were to occur. Plus, we do have a good health system here in New Zealand as well.
Also worth mentioning is that our daughter has some cover under our policy, which we have also cancelled. At age 14, our daughter does not need this type of insurance. So, why did she have it? For this policy, the insurance salesperson quickly linked her to our policy for “free”. No fees. And no commission for them. Yet. But insurance brokers are a patient bunch, and they know that as the child grows, they can also start to charge them monthly premiums. They then incrementally increase those premiums, precisely what has been happening.
Time to peel another merino layer off
Coming back to my running/insurance analogy, the time had come to peel another layer off because we are financially strong enough to self-insure if something were to happen to either of us. We now have many multiples of the amount we were insured for, and we could call on that in times of emergency.
Not only that, but Jonny and I talk about what the other is likely to do in case of our death or injury. There will be enough cash for either of us to carry on for many years. Still, in addition to that, we talk through the likely prospect of the remaining/uninjured spouse also selling our home and moving to a smaller and cheaper one to free up cash and create a more manageable lifestyle. I find this a reassuring discussion to have.
Insurance: Not too little, Not too much.
We are constantly looking to find that balance between being underinsured or overinsured. The purpose of insurance is to provide money to cover events you cannot cover yourself. But there is no point in paying premiums for something we no longer need. A few years ago, we stopped life insurance because we no longer had any debt, and we had money in savings and investments which we could use if needed. If either of us were to die, we had enough money for the other to be OK for several years - enough time to get back on our feet and on with life. We stopped our income protection insurance because, having both moved into part-time work, our income was not really worth ‘protecting’ anymore. If either of us were to lose our job, it’s probably not going to be all that difficult to find another one. And if it took a couple of months for that to happen, we had savings we could draw on.
When we review our insurance, I’m primarily asking whether we could self-insure or not if some traumatic event were to occur. If we would struggle to cover an event, then the insurance policy and the monthly premiums are worth keeping around. In the case of the trauma cover insurance that we ended in July, I feel confident we could cover an event. I can cancel the policy and use the $241 monthly premium payment to buy ETF investments and further strengthen our position.
With that premium now gone (but having paid for half a year already), our total insurance premiums for 2022 are looking to be around $5890. Next year, our premiums for the remaining insurance policies for the house, contents, health and cars will be about $4924 for the year ($410 a month, $92 per week).
That feels financially manageable AND that we have enough insurance coverage.
Next on the chopping block is…
Health Insurance. We currently pay $180 a month ($2,160 per year) - a large chunk of our annual insurance premiums. As we age and begin to wear out, our premiums grow, and it is obvious that they will reach a tipping point where they will become unaffordable. So, I’m preparing for that now. I’ve already trimmed back what our health insurance covers and pays out on, thus lowering our premiums. At the same time, I make a weekly $40 contribution ($2,080 per year) to a sinking fund bank account specifically earmarked for health-related stuff.
This fund has been running for some time now, and the balance ebbs and flows. I recently had minor surgery partly covered by insurance; my portion was $780. I grabbed the money from our ‘health account. No sweat.
I intend to increase the weekly transfer into this sinking fund and build the account up to probably $5,000 so that when we stop our health insurance, we will have a decent (and constantly replenished) pot of money for any medical care we might need to pay out of pocket. We can draw from investments for anything more significant (a new hip due to all my running, perhaps😩).
Once we drop that insurance in the next couple of years, I think we will be done and will have the appropriate coverage for the next phase of life.
Try to be worth more alive than dead.
I’d encourage you to think about your situation and tweak it as necessary. I know that my parents successfully navigated life with only house, contents and car insurance. This shows me that we can get by without the vast range of insurance policies being hawked to us by insurance brokers/salespeople. If you ever find yourself saying with pride, “I’m insured for $2,000,000”, you probably have a problem. Few of us need that amount of cover. Try to be worth more alive than dead is my advice! By which I mean, grow your wealth. Be practical and mindful of what you need because before you know it, that collective monthly premium can quickly get out of hand.
