Money Truth #10

We’ve all seen people’s lives turned upside down by floods, bushfires, droughts and
cyclones in the media. People who have been through a natural disaster
know how devastating it can be.

Of course, not all of life’s trials are caused by extreme weather. Traffic accidents,
house fires, unexpected unemployment and ill health are other events that have the
potential to turn your life upside down if they were to come your way as well.

Fortunately, not everyone is unlucky enough to go through one of these devastating
situations in their lifetime, but it could happen to any one of us without warning!
If it does happen, it can take a long time to recover.

The risk of something bad happening to every one of us is always present. We do our
best to stay out of harm’s way, but that does not guarantee we will avoid a major
loss or health issue at some point in our life.

As a perfect example, while writing this book, my wife was admitted to hospital for
some tests and a few weeks later had open heart surgery to repair a failing valve.
This came as a total surprise to both of us as there was no apparent illness leading up
to this. It certainly had an impact on our normal life routines and will do so for some
time to come.

Insurance companies offer policies that spread the risk of something bad happening,
and allow people to share the cost of unexpected life tragedies.

E.g. If everyone pays a small premium for a car insurance policy and 5% of all policy
holders have an accident, everyone shares in the cost of helping the 5% to get their
cars fixed. The same applies to house insurance, life insurance, health insurance,
unemployment insurance and so on.

The risk is shared by all policy holders and the benefit is provided to those who suffer
a loss.

Insurance is so important that some policies are mandatory, e.g. Motor Vehicle ‘Third
party’ insurance is automatically included in the cost of vehicle registration. This
insurance covers the cost of injuries that may happen to anyone involved in a car
accident when it is someone else’s fault.

Your kids need to understand the risks they will be taking if they do not have
appropriate insurance cover. E.g., it’s so easy to get behind the wheel of a car
without thinking about insurance; especially when it is not your own car. If your child
were to drive a friend’s car; they would most likely not be thinking “does this car
have insurance?”.

In an instant life could change dramatically, but it’s too late AFTER something bad
happens to realise you should have had insurance. The damage is done, and life will
never be the same again!

When you are young you have little comprehension of consequences. As a parent
you need to alert your kids to the importance of always being covered by
appropriate insurance policies to protect them from the potential of serious
hardship.

By the time they reach adulthood your kids should know…
• The purpose of insurance

• What policies are available

• Who is protected by insurance

• The benefits of having insurance

• The risk of not having insurance

• How to determine what insurance cover they need

• How to recognise unnecessary insurance. Some salespeople don’t care if you
buy something from them that you do not need! E.g., some banks were selling
Credit Card insurance that would protect you from Credit Card fraud, but the
banks already had an obligation to protect consumers from that loss
anyway, so they were selling insurance for a risk that did not exist… they had
to refund the premiums once this was exposed.

Home Insurance
• The difference between house insurance and contents insurance
As a renter your kids should have contents insurance. Building insurance is
paid for by the landlord but does not insure any of their personal belongings.
• How to determine how much ‘contents’ insurance cover they need.
It can be an unpleasant task but taking out the correct amount of contents
insurance requires a stocktake.

Your kids need to make a list of everything of value that they own when they
move out and each year when they update their policy. This is really the only
accurate way for them to determine how much cover they should have. The
stocktake should produce a list of items from each room. Ideally the
replacement cost, purchase cost and estimated current value of each item
would be included on that list (as much as is possible), and totals of each
would then give an accurate idea of how much to insure for.

Please note: – It’s not necessary to itemise things like shoelaces or underwear.
An estimated collective value of these kinds of things is quite acceptable.

• The difference between stormwater damage and floodwater damage and the
significance of the difference between the two when it comes to house
insurance.

E.g. an insurer may define Floodwater as water that rises from an overflowing
waterbed and they may define Stormwater as fast flowing water that is
running downhill from a slope.

If your child has damage from water entering their home, it may well come
down to definitions as to whether they get a payout or not. If you do not
teach them to ask the question before the damage occurs it’s going to be too
late after the damage has occurred and they fall on the wrong side of the
definition!

• How to determine how much ‘house’ insurance cover to take out
If your house burns down there is the cost of removing the rubble as well as
the cost of rebuilding the house. Your child will also need temporary
accommodation during the clean-up and rebuild.

The consequences of underinsuring, e.g. If you insure your house for $500k
and replacing the house will cost $600k what happens if a truck crashes
through the front door causing $100,000 in damages?

Many insurers will adopt the position that since you have insured your house
for 5/6 of its value, then you must be self-insuring 1/6 of your house’s value.
In this case they will reduce their payout accordingly.

In the case of the truck crashing into the house, even though your child has
more insurance than the damage caused by the truck, the insurer will not pay
the full $100,000 repair bill. They might pay 5/6th of the bill instead.

Make sure your kids know to ask about co-insurance or under-insuring (and
the consequences) when taking out a policy and make sure they know the
importance of taking out sufficient cover.
NB. Taking out too much insurance will not produce the opposite effect. I.e. 

An insurer will not pay out more than the damage costs incurred if you overinsure! (You didn’t expect any different than that surely!)
Life Insurance
• When and why your kids should take out Life Insurance
As a general rule, as soon as your kids take on debt that would cause hardship
to loved ones if they were to pass away prematurely while that debt exists,
they should have sufficient life insurance in place to clear the debt.
• The different types of Life Insurance Policies available, e.g., Death, Total and
Permanent Disability and Income Protection

If your kids have sufficient Life Insurance in place to pay off debt in the event
of their passing BUT they are involved in an accident that leaves them unable
to earn an income either temporarily or permanently, then Life Insurance that
only covers an event causing their death will be useless to them.

Total and Permanent Disability (TPD) and Income Protection (IP) insurances
are essential parts of a thorough life insurance package

You need to make sure your kids understand this as soon as they have
dependents or debt that could put loved ones at risk of inheriting debt (such
as mortgage payments).

IMPORTANT. Your kids may see advertisements for life insurance on the TV.
Taking out one of these policies is easy and often cheaper than through a
broker, BUT there can be a catch.

In the event of a claim the insurer will then check to see if your child had a
pre-existing health issue that might have contributed to the claim, and they
may use that as an excuse to NOT give a pay-out.

On the other hand, when taking out Life Insurance through a broker, all of the
questions relating to pre-existing health conditions are asked at the time of
taking out the policy, and once satisfied that your kids are OK, the insurer will issue the policy. Then if a claim is made, the payout will not be subject to health checks.

Car Insurance
NOTE: – The answers to the following questions have deliberately been omitted. If
you do not feel you can confidently answer them, you need to make it your business
to find the answers for your own benefit and so you can pass this information on to
your kids.

• What are the different types of insurance available for motor vehicles?
• If your kids drive someone else’s uninsured vehicle and there is an accident
that is their fault:
o Who is liable to pay for damage to the vehicle they were driving?
o Who is liable to pay for damage to the other vehicle(s) in the accident?
o Who is liable to pay for injury costs to any person injured in the accident?
• If they injure someone in an accident, what insurance would cover their
costs?
• In what circumstances might their car insurer legitimately refuse to pay for
damages your child causes in an accident?
• The difference between ‘comprehensive’ and ‘third party’ insurance for a car
• What is an ‘excess’ in relation to car insurance?
• When might your child have to pay an excess?
• What is a ‘no claim bonus’?