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Life Insurance Sensibility

What is your attitude to Life Insurance?

There is often an air of reluctance to discuss personal life risk matters. Life insurance sensibility is your general attitude to this topic. In this post, we trust that you will come to see that some of the life risks that you encounter can:

  • have a devastating effect on your financial future; and
  • that financial risk to you and your family, can be mitigated using appropriate life insurance products with adequate levels of cover.

What is your view?

Do you have a personal insurance philosophy?

Do you have an opinion as to the value of insurance (as a risk management strategy)?

Do you regularly review both your attitude towards – and the amount of protection you have, through life insurance policies?

Your responses to the above questions will help you to determine the level of your sensibility to this financial product. This may also indicate how well your family is protected in the event of you meeting an untimely life-changing event through accident or illness.

Why Life Insurance is known as ‘personal risk insurance’…

Risk pervades all aspects of our lives and the occurrence of certain events will impact our ability to undertake some, or all of the activities in which we normally participate. These events are commonly referred to as ‘personal risks’. Life Insurance policies are outsourced, personal risk management contracts that allow us to mitigate (offset) the financial costs experienced in these adverse events. Whether or not we understand our situation in this regard, remaining uninsured through a life insurance company leaves us ‘self-insured’ to bear the financial consequences of those events.

It is wise to have a risk management plan so that you can be prepared to deal with events that may arise and for which you can have a reasonable awareness of their financial consequence (albeit that it may not be possible to quantify that consequence precisely in advance). Some areas of general risk that most households consider (and usually insure), are:-

  • Property (building and/ or contents – including whether to include specific items?);
  • Motor vehicle/ bikes (and if applicable: marine, caravan, etc);
  • Personal health insurance;
  • Funeral;
  • Pets; and
  • Home workers.

When events occur that have a disruptive effect on our lives, the first reaction is to try to restore our position to normal, as quickly as possible. Whilst this entails various activities – perhaps some house/ car repairs, perhaps some health management/ therapeutic treatment – almost inevitably there will be a financial cost involved. This is the point at which risk management and wealth protection intersect: it is the point at which your personal insurance sensibility will be tested. Almost certainly, you will have all of the general risks mentioned above, covered to an appropriate level. Consider whether having any of that insured will be relevant, if you lose your own capacity to earn: or indeed, if you are injured and need to utilise invested capital to regain your health to the best level possible.

Awakening your sensibility

As an advisory business we have developed a personal risk insurance philosophy to ensure that we offer clients the most appropriate level of wealth protection that we can in their personal circumstances. Whilst our philosophy is constrained to personal risk insurance through life insurance policies, your own life insurance sensibility (reflecting your personal insurance philosophy) will extend beyond that – to personal health; and general insurances (such as over property and third party liability) – along the lines detailed above.

In considering the potential risk events listed above, determining the amount of insurance cover required takes some time and deliberation (as well as an understanding of how the different types of insurance contracts operate). Having determined the potential financial consequences of any one of these risks, it is then appropriate to consider how much of that risk you are prepared to self-insure: that is, how much loss are you prepared to bear as a consequence of one of these risks materialising, in spite of the effect it has on the financial future of yourself and your ‘dependants’.

In some of the areas you will have the option – and in others be forced – to share the risk, either by way of a ‘claim excess’, or by limitation as to the level of cover available – even if you choose to outsource the risk to an insurer. Consider the way claims on policies such as the following work:

  • building & contents (averaging if under-insured; excess usually applicable on claim) – what would it cost to clear the rubble and to restore your home and furnishings to their previous standard?
  • motor vehicle (comprehensive: usually carry an excess on claim) – how long will you be without use of your vehicle and what are the financial implications of not adequately insuring to mitigate the cost of dealing with that issue?
  • personal health insurance (limits on various health services; excess on claim for hospital admissions) – and you will appreciate the principle involved.

Self-insurance dilemma

Whilst you may be confident that you (will) have the capacity to bear the financial cost of any one or more of the risk events, the timing of any one of them – or indeed, any number of them coincidentally – is less predictable and may be more challenging.

A question to consider in this regard is whether the loss you are prepared to bear in such an event will jeopardise your future financial security or the attainment of specific financial goals?

The most common explanation as to why people are prepared to self-insure is that they believe that if they set aside the money they would otherwise use to pay their insurance premiums, they would be able to meet the financial loss from those savings. There are two arguments as to why this is a risky strategy itself:

  • Almost nobody ever actually sets the money aside specifically for such events; and
  • The cost of a single person carrying the risk as opposed to the pooling of savings by a larger group of insured, is significantly higher (that is, premiums will in most cases prove to have been cheaper than the cost of the repair/ restoration/ recovery).
  • Clearly there are some aspects of the financial cost of some risk events that individuals can bear, but if the reason for not outsourcing is that ‘the premiums are too expensive’ it may be that you are not really able to take that risk by self-insuring.

Ultimate wealth protection

Many of the general insurance policies available are ‘asset protection’ instruments: life insurance products can be used in certain asset protection strategies, but are more commonly a wealth protection mechanism.

Wealth protection is important where an accumulation strategy is in place: wealth is being accumulated through regular savings or through capital growth from investment; where future financial plans are dependent on the continuing financial capacity of particular individuals: wealth arising through business valuation growing because of the involvement of particular individuals (and/ or the cashflow from the income they earn); and where personal and business succession planning suggests that there is some inequality or undesirable imbalance: such as for estate planning bequest equalisation, capital gains tax offsets – and for business buy-sell agreement funding.

Protecting the family wealth ensures that lifestyles are not adversely affected financially, at a time when, because of some debilitating event, they are impacted emotionally.

As mentioned above, we have developed an insurance philosophy that underpins the offer we make to clients (and prospective clients). Our philosophy complements our investment (wealth accumulation) philosophy and guides us in a range of matters to ensure you best interests are protected – and it includes Regular review with a view to maintaining an appropriate level of risk protection.

Our experienced advisers listen to your needs as expressed in identifying areas of risk in your financial plan; understand that there may be extenuating circumstances to consider in evaluating and quantifying the risks involved (by reference to a calculator and researched criteria); and have solutions to the mitigation of those risks – whether that is through a wealth management strategy to self-insure, or to outsource the risk to an insurer (and allow for the cashflow to fund premiums).

You are invited to meet with one of our advisers: call our office (on 07-34213456), or complete the Contact Us detail on our website to arrange an appointment.

(Life Insurance sensibility was first published as a Blog post on this website in May 2015: it has occasionally been refreshed/ updated, most recently in June 2021.)

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