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If you’re itching to cancel insurance premiums, or want to know where to splash out, and where to skimp, read on.
Insurance premiums are the Aussie Doc household’s second largest expense. I reckon they are the number one most annoying expense for most households!
With insurance premiums, you are almost guaranteed to lose more than you claim.
Insurance companies exist, after all, to make a profit. The most important policies are for the financially responsible, a necessary (but hopefully temporary) evil.
As your investment portfolio grows, you will reach the stage of being able to self fund for more worst case scenarios. You can then cancel insurance policies to save money for more exciting things.
It is important to consider whether your policies are a). Necessary b). Adequate and c). providing value for money.
Why Insurance is Important.
Few financially responsible people would take a risk not insuring their home. But many are dangerously under insured, just one disaster away from financial ruin.
It is also easy to get up sold on the number of, and value of insurance policies.
It’s tempting to think “If this terrible thing happened” it would be nice to have some extra cash.
But we insure for events that are unlikely to happen. As soon as an adverse event seems plausible, insurance companies refuse to cover it. They are businesses, intending to make a profit of course.
So, insurance can be considered similar to a sort of morbid poky machine. The company (Poky machine) is programmed to pay out a percentage of earnings. Which means, you are probably throwing your money away on insurance premiums.
Why would anyone do that? If the unlikely event you are insuring against is significant enough to threaten your way of life.
So, we insure against death or disability of the main income earners. We also insure our car in case we are involved in an accident with a TESLA. If our house is destroyed in a fire, most people would not be able to fund a rebuild – and service the pre-existing mortgage.
These are all disastrous events, financially, as well as the occasions themselves.
Cancel Insurance You Don't Need
When you buy a new fridge, consider this when the sales person asks if you would like an extended warranty. If your new fridge only lasted 3 years, you would be very annoyed.
Even if the company weren’t embarrassed into replacing it, would the annoying cost of a new fridge destroy you financially? Not if you are financially responsible and have an emergency fund.
Scott Pape introduced this idea in his fabulous book “Barefoot investor”. Insure only the things you need insurance for.
You will find insurance policies have extensive exclusions, meaning they often won’t pay up for that 3-year-old fridge anyway!
If your Iphone 37 mysteriously breaks, do you actually need the 38 model to survive or will an affordable brand or preceding model do?
Do you have insurance policies that you don’t really need? Cancel insurance policies you don’t need and put the savings into your emergency fund or investments.
No lifestyle sacrifice required!
How Can You Save Money on Insurance When You Need It?
I’ve been pretty irritated by the fact I’m paying so much on insurance premiums. But there are quite a few policies- professional, cars, boats (Mr Aussie Doc’s weakness) health, life, income protection and home and contents.
Keeping the number of vehicles you own to a minimum will reduce the amount you pay in insurance premiums significantly. Unfortunately, this is an argument I’m not winning at home!
Our home and contents increased significantly over the past few years, and despite the land it standing on never having flooded in the history of time, it is now considered Tsunami prone.
Alas, I have no ocean views, but we are a brisk 10-minute walk to the beach.
I found the only way to get my premium down was to increase my excess. We increased it to $5000 a few years ago, and this year will see if they will let me increase it to $10K.
I would be annoyed at having to pay $10K towards my house being swept away by a Tsunami, but feel this is extremely unlikely to happen and the 10K will be the least of my concerns if it does!
Income protection is my largest cost. It is, at least, tax deductible if it’s paid for outside superannuation.
How to Save on Policies & When to Cancel Insurance
- Home and Contents insurance
Home insurance should be organized as soon as you sign a contract.
Imagine buying your dream home, signing the contract and it burning down the week before you move in!
Whose responsibility is it? Can you back out of the contract? Does the bank care you now have half a million dollars of debt and no house?
Just get it sorted immediately. The risk of this extremely unlikely event could be catastrophic.
Buildings insurance is the most important. The building being destroyed while you still owe on mortgage would financially ruin most people.
More than half of those affected by the bushfires were uninsured or under insured.
Rebuilding a home is often more expensive than the purchase price.
There are also significant demolition and architect costs to add. You would also need alternate accommodation until the rebuild was complete.
The cost of rebuild goes up over the years due to inflation. In times of natural disaster, prices for the work increase as demand sky rockets and tradespeople don’t multiply.
If you earn an expensive house consider getting a valuation from a quantity surveyor. More details about getting your insurance right here.
Most people need to keep house and contents insurance lifelong.
If you could pay for house demolition, rebuild and alternative accommodation during rebuild without financial ruin you could cancel insurance on your home.
Health insurance is often a pretty poor deal. It becomes more attractive once your income reaches over $90K and as you get older.
We have a pretty good public health system though, so consider carefully whether you want to get started paying these premiums if you expect to earn less than 90K long-term.
The benefit with private health insurance really comes with age, and the little luxuries of a quieter environment and skipping the queue for non-urgent issues (eg joint replacement).
Read the detailed article about health insurance here
Given the largest benefit with health insurance comes with age, if you choose to pay for it, ideally you never want to cancel insurance for healthcare.
The financial strain of premiums probably eventually causes people to cancel their policies.
- Car insurance
Compulsory 3rd party (CTP) insurance is mandatory, but only covers personal injury liability.
Third party insurance covers damage to other vehicles if an accident is deemed your fault. I feel like this is the minimum acceptable car insurance.
Fire and theft cover can be added to third party insurance for an additional expense.
Comprehensive insurance is the top-level insurance that covers damage to your own vehicle as well. There are huge amounts of variation in the value provided, outlined in tiny print in the PDS.
- How to Save on Your Car Insurance
Comprehensive insurance is significantly more expensive than third party.
You may wish to cancel insurance for comprehensive vehicle cover and downgrade to third party insurance when your annual premium costs 10% of the car value.
If you have emergency savings that will cover the cost of replacing the car, this seems a reasonable option.
You can insure your car for an agreed value,when organizing your policy, or market value at the time of the accident.
Agreed value is more expensive, and probably only of benefit for those with outstanding car loans or vintage/premium vehicles.
Insurance is especially expensive for those aged under 25, although this can be reduced with a skilled drivers’ course. Drivers aged over 50 and those that don’t use the vehicle much may be able to get discounts.
No claims discounts are the 2nd biggest factor in deciding your premium. Up to 70% discounts are available to those that can brag 5 years accident free.
The cost of your premium should be weighed against the excess. Once you have reasonable emergency savings, it could save you money to increase the excess.
Read the PDS documents to ensure you are comparing like with like. Some policies include roadside assistance cover, and after accident care such as car hire and towing.
Online applications may provide discounts over phone call applications or automatic renewals.
Also, paying the annual premium up friend can also produce a saving over monthly premiums.
Try and spend an hour pricing your policy premium each year to ensure your still getting a good deal.
Finally, check whether your preferred company offer Multi policy discounts.
- Income protection
This is my priciest policy – costing an eye watering $11,000 per year. And I’m still underinsured. Gulp!
But we are a single income family, with no ability to replace my primary income in case of my incapacity.
It’s tax deductible, so in reality the cost is just over half the premium.
Income protection may not be necessary for double high-income families, especially those who save ~50% of joint income, or have 5+ years in living expenses invested.
But income protection is often most vital in the most expensive phase of lives – with large mortgages and small children.
With age, policies increase quite dramatically from early 30’s.
There are options of level and stepped premiums.
Level premiums are supposed to stay stable in cost over the years (although everyones policies have increased significantly over the past 5 years).
So, level premiums are more expensive at outset with the idea you will save money over the long-term.
Stepped premiums increase every year with age. Premiums escalate dramatically over the age of 50, eventually becoming unsustainable to most.
The choice of level or stepped premium depends on your age, how long you are anticipating needing insurance and affordability.
If you are planning to have children, or buy a home, consider securing your policy ASAP to avoid premium increases and the risk that you may suffer a health condition that makes you uninsurable (doesn’t take much).
- How to Save Money on Income Protection Insurance
Premiums decrease significantly with longer waiting periods.
Consider whether you could tolerate waiting periods of 60 or 90 days instead of 30.
It is best to see an insurance broker to organize your premiums. They will be able to guide you through the pros and cons of each option.
And despite the huge commissions they receive, they tend to be cheaper and provide better quality insurance than the alternatives.
Plus, if you ever need to claim, it’s their job to fight for your claim. I would consider speaking to more than one broker for recommendations given they are clearly not independent.
As you age, premiums get more expensive, especially for stepped policies.
Throughout your life, it is worth considering your insurance needs annually and considering whether you are adequately, or over insured.
Once you are financially independent, or have enough savings to last until your total disability pay out, you may decide to cancel insurance for income protection and spend the cash on something more fun.
As your insurance requirements increase, it may be worth keeping your old policy and adding a separate policy to make up the shortfall (especially if you have an agreed value policy, which is no longer available).
That way, once you have more savings and investments, it will be possible to cancel one insurance policy and keep the other without re starting at the older age premium.
It is possible to get income protection policies that pay to age 65. How long you need is a matter of balancing your savings, time to retirement, gap between your living expenses and minimum wage.
As your assets grow, your needs for income protection will likely drop.
Once you are financially independent (able to pay for living expenses out of investment income) you can cancel insurance for income protection.
If you have enough investments to cover the majority of your living expenses, and could (and would) work an unskilled job in case of disability, you could cancel insurance and save your premiums.
Income Protection Inside vs Outside Superannuation
Income protection often comes automatically with superannuation (unless you’re under 25, need to opt in).
This is not tax deductible, and usually a poor-quality product. It may be sufficient for your needs if you are young, healthy, have no children or debt.
These policies are usually any occupation cover (if you’re a neurosurgeon who has become paraplegic but could still work in a call centre you will not be able to claim).
As you train in your desired occupation, your specific skills will earn you a significantly increased wage. Most commit themselves to larger financial obligations (e.g. big house).
If an unskilled job will not cover your living expenses, you need Own occupation income protection.
Superannuation cover also is usually a short-lived policy, mine was for 2 years. That two years flies by pretty fast when you’re in the midst of a health crisis.
If you qualify for total permanent disability at this point, 2 years cover may be enough depending on how much TPD you have.
John had 2 years automatic income protection, TPD and life insurance through his super. He’s had a shocking 2 years with a cancer diagnosis, debilitating surgery and cardiac complications. He is taking daily pain killers that make him sleepy and he cannot drive. He can no longer work in the occupation he has worked in since leaving school.
On enquiring if he qualified for Total permanent disability, John was told “If you can move your arms and legs you don’t qualify.”
- Life and Total Permanent Disability insurance
Life insurance provides a pay out to your family should you die.
A significant amount of cover is often required to ensure your family don’t lose their home in the event of your death.
If you children attend private school, most would like this to continue this to avoid any further disruption after such a traumatic event.
Your stay at home spouse may be able to return to work, but will need time to grieve and support children as a priority. They may have been out of the work force for many years, and may be able to earn only a tiny proportion of the household income prior to your death.
This is all very morbid. But it requires careful thinking through all scenarios to work out the lump sum required. Of course, insurance companies will tell you to insure for far higher sums than necessary, to increase their profit margins.
Total permanent disability is often linked to life insurance.
It is probably even more expensive, given the worst case scenario is that you are incapacitated and needing long-term care on top of no longer earning an income.
Consider your income protection and TPD together to calculate how much you require.
Your insurance needs will decrease over time as your assets grow. Savings in the bank are likely a more effective (and liquid) way to pay for funeral costs.
By the time you reach financial independence, you may only need TPD Insurance in case of long-term care needs. Some (especially hospital employed) doctors will be financially independent in superannuation, but unable to access it until preservation age.
Early access to superannuation can be granted in catastrophic conditions
Take into consideration any income protection you are still paying for, emergency savings and investments outside superannuation.
I would want 12 months living expenses available in emergency savings or income protection before I cancel insurance for permanent disability and death.
It seems likely approval for early super access is not a quick process.
Once you have more investment income than needed to cover living expenses, I cant imagine why you would want to pay any more premiums.
- Professional indemnity insurance
Professional indemnity insurance covers legal challenges from professional incidents. It is important for all doctors, and many other professions.
A higher amount of cover is required for self-employed individuals.
I personally have been reluctant to shop around for these premiums, with concern if an issue arises and causes controversy over which insurance company covers the incident.
Most of us sign up as students and stay loyal to the company career long. It’s worth doing some research before signing up for whoever is offering free pizza.
You need reasonably priced premiums, and a history of looking after their members in the event of claims.
A kind and supportive voice to talk to is very important if a mistake is made.
It is important to speak to your medical defence if anything occurs that could possibly become a legal issue. Small print terms state they may not cover you if you have buried your head in the sand and not told them.
The couple of times I have spoken to my medical defence company, they have been kind and reassuring that I have done nothing wrong.
Insurance premiums are an expensive pain in the butt. Spend a little time each year going through your insurance needs, and each of your policies. Ask yourself
- Am I adequately insured if I die?
- And adequately insured if I am permanently incapacitated?
- Am I adequately insured if I am unable to work for a year or two due to illness or injury?
- And adequately insured if the house burns down or is flooded?
- Am I over insured?
- Can I save money by increasing waiting periods or excesses?
- Is it time to cancel any of my policies?
- Has my car reached “bomb” status and it’s time to downgrade to 3rd party car insurance?
- Am I claiming tax deductions (income protection and professional indemnity)?
- Have I checked I’m paying reasonably priced premiums for good cover on car, house +/- health insurance?
Aussie Doc Freedom is not a financial adviser and does need offer any advise. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.See full terms and conditions in footer