There are as many reasons for buying insurance cover as there are people who buy it. Perhaps though, there’s a broad answer. Insurance is really a way of managing risks.
Why do we need insurance?
Simply because they need financial protection against a risk.
- If you drive a car, there’s a risk of damaging it;
- If you own a home, there’s a risk of fire;
- If you own valuables, there’s a risk they may be lost or stolen.
Insurance will provide financial compensation if a risk becomes a reality.
What types of insurance cover should we have?
That depends on the individual and how many risks he or she is prepared to carry personally. One way to illustrate some typical risks, and how to manage them is to use a case study.
Peter and Sally have been married four years and now have a two-year old daughter, Rebecca. They’re buying their own home, and part of their household is an oversized German shepherd dog, Rex. (Now Rex is really a second child; he loves everyone, even the postman.)
When Peter and Sally first moved into their home, their bank insisted on insurance cover for the dwelling itself. The bank knew that the risk of fire or serious damage from storms were risks that had to be covered by insurance. The level of cover was excellent, and the premium was reasonable.
Each year they have increased their building insurance cover. That’s good sense, after all, their home is increasing in value.
If the worst were to happen, they want to be sure they have sufficient insurance cover to rebuild a home equally as good.
Sally was the one to raise the question of insurance for the contents of their home – furniture, electrical appliances and personal valuables. At first, Sally didn’t consider that the risks warranted insurance. But by the third year, the family had accumulated a good deal of furniture, an expensive hi-fi, a lot of other major appliances and they bought some expensive carpets.
Sally grandmother had given her some fine, expensive jewelry, too.
What would happen if Peter and Sally were robbed? (Rex probably wouldn’t be much help.) What if a water pipe bursts and ruins the carpet?
Sally talked to Peter, and together they calculated the replacement value of their possessions. And they were quite surprised at the total of nearly $100,000. They couldn’t afford to take the risk of a fire, or a burglary, or water damage. They needed insurance.
It was all easy to arrange, and like insurance cover for their house, it wasn’t expensive. In fact they arranged a combined home and contents policy which covered all of the risks they’d thought of, and many they hadn’t.
Six months ago a risk they hadn’t considered became a reality. Rex found the side gate open one afternoon and decided to take a walk on his own. He was heading towards where he knew a young lady dog lived when Sally’s neighbor spotted him and shouted to him to turn around and go back home. He wagged his tail, hung his head, and did as he was told.
But he glimpsed a cat across the road, and since he has never had any time for the feline species the chase was on.
Rex didn’t get close to the cat. He did cause a minor accident when a car swerved to miss him and struck a brick fence. And Rex was in the “bad books” with Sally and Peter all week.
Who would pay for the damage?
Legally it was Peter and Sally’s responsibility.
But Peter seemed to recall talking about this type of thing when they’d arranged their household insurance, something about personal liability.
A phone call confirmed they were covered. In fact, Peter had paid a small extra premium to cover all sorts of “personal liability” situations.
Now health insurance is something Peter and Sally have always had. They could never afford to meet medical and hospital costs if their daughter, or either of them, became seriously ill. And there’s always the risk of an accident. After all, the risk of an accident is why Peter has insurance on his car.
Peter has never been really sure about the policy he has on his car. He has “fully comprehensive” at present, but since his car is only worth about $10,000, he’s not convinced he needs that level of cover.
Mostly, he wants his insurance to cover the costs of damage to other cars and property, should he have an accident.
Peter has heard about “third-party property” insurance, and when his renewal notice arrives, he’ll ask his insurer about his options. He’s heard it’s cheaper, but Peter wants to be sure that the risks he wants covered, are covered.
At work, Peter contributes to a superannuation plan. Some weeks he’d like to have the money in his pay packet, but he knows that superannuation is insurance for the future. So he plans to stick with it.
Sally wants him to supplement his superannuation with some term life insurance. Sally sees it this way – if Peter is accidentally killed, how will she meet all the bills, particularly the mortgage.
Sure, she could go out to work. But what about Rebecca? Sally knows that term life insurance will provide the money to keep going if something happens to Peter. And she sees the value in having this form of insurance on her life too – so Peter and Rebecca can carry on if something should happen to her.
Peter and Sally have made a promise to find out more about term life insurance. And they want to know about sickness and accident insurance too, just in case.
Peter and Sally are sensible people. They’ve come to see insurance for what it is – financial protection against risks.