Is Insurance Worth It?

"You feeling lucky, punk?"

Clint Eastwood as 'Dirty Harry'

Famous words from the immortal movie cop "Dirty Harry".

When we spend hundreds of dollars a year on insuring the things we own, it can feel like a terrible waste of money.

Insurance is what we buy to protect us from extreme financial loss. We can insure our medical treatments, valuables, vehicles and houses. There are many other sorts of insurance, but these are the main ones.

The first time you will likely consider insurance will be when you purchase a car. To register your new vehicle (new or used) in your name, you must prove that you have purchased Compulsory Third Party insurance. This insurance covers only people. It is to compensate any person, except the driver at fault, who is injured or killed due to a driver's negligence. You cannot legally drive on the road in Australia without this sort of insurance.

The second type of insurance you want on your vehicle will pay for repairs you are liable for, whether that is property, other vehicles, animals, or whatever. This is called Third Party Damages Insurance (hence the confusion with the above). This insurance will not pay for your vehicle to be repaired if you caused the accident, but it will pay for the damage you do, whether writing off an expensive car or smashing into a house.

The third sort of insurance for your car is comprehensive. This insurance will pay for any damage you do to your shiny new vehicle. This is the most expensive sort of insurance, but often worth having if you have a loan on your car and will be paying it off for several years or if you will not be able to replace it if it is damaged.

Comprehensive insurance will include repairs to your car (either in an accident or hitting your garage wall) and to the vehicle or property of the person, you hit. Comprehensive includes Third Party Damages insurance but does NOT include Compulsory Third Party insurance. They are different, so make sure you have two insurance policies on your car; the Compulsory Third Party and either Comprehensive or Third Party Damage insurance.

Your insurance premium will depend on a range of factors that affect the pricing:

The type, age and cost of the vehicle, the age and sex of the driver, the part of the country lived in if the car is garaged or parked on the street, etc.

If you think the premium for the insurance is too high, you can bring it down by raising the excess on the policy. So that you know – the excess is the money you will put forward to resolve the claim. For instance, If you have an accident and the damage is estimated to be $20,000, and you have an excess of $1000, the insurance will only pay $19,000 while you will have to pay $1000 towards the repair. Excess is the amount you set before you take out your insurance. It can be raised or lowered during the insurance term but not while a claim is underway. It can be a gamble to set too high an excess, but only you can decide if it is worth it.

If you think the premium for the insurance is too high, you can bring it down by raising the excess on the policy.

It is also worth exploring getting quotes from various insurance companies as the prices vary widely. Just make sure that you are getting the same coverage for each quote. Alternatively, you can outline what you want with an Insurance Broker, and they will do the research for you and provide 2-3 quotes for the insurance you need.

This is an excellent option if you need a range of policies across your home, content, vehicles, etc.

The second insurance policy you will likely need is contents insurance. As you establish your own home and acquire furniture and appliances that become important to you, you must protect those things from theft, fire, flood, etc. If you rent, you won't need to insure the building, as your landlord has taken care of that. But you are responsible for protecting the things you own and will want to replace in the event of a problem.

This requires you to estimate what you think it would cost to replace the items you have and request a range of quotes from insurance companies. It is usually relatively inexpensive to have contents insurance (depending on what you have), and it will get you back on your feet quickly in the case of disaster.

In Australia, health insurance is optional. The Medicare system provides access to health providers, but you have little choice about the provider or the timing of the access to that provider if they are swamped. For instance, if you need something less than life-saving surgery, such as a knee replacement, you may find yourself in a very long queue for surgery. However, if you are in an accident or giving birth, you are provided with health care at no cost to you.

By the time you turn 31, you have to decide if you will have hospital insurance. If you choose not to have hospital insurance, the government will add a Medicare levy (1-1.5%) to your tax bill if you earn over a certain amount. You can change this anytime, but that is when the levy kicks in.

If you have bought real estate, it is pure folly not to insure it.

This gives you the incentive to take out hospital insurance to reduce the strain on the public system. Private health insurance also allows you to pick your doctor and will cover a range of items that Medicare will not, such as physiotherapy, dental and ophthalmology.

And now to the big ticket item, protecting your home. If you have bought real estate, it is pure folly not to insure it. It is the biggest purchase you will likely make in your lifetime, and having it appropriately insured is vital. Not only because you will continue to pay it off for many years, whether it is livable or not, but the unpredictability of life events also makes it important to your daily peace of mind. Every day houses burn down; trees fall through them, cars drive into them, rivers run through them...Seriously, the unpredictability of the changing weather is enough to give you pause. Drought and fire one year, flood and pestilence the next. Even if you will bear the cost of a high excess, insure your home appropriately. You do not have to insure for the purchase price, as you will not be re-buying the land or building if you are in a unit. But you have to consider demolition costs, rebuilding costs and out-of-home living costs. Talk to your insurance agent about the cost of rebuilding and do some research. Read the Product Disclosure Statements (PDS) carefully to understand fully what you are covered for.

Insurance is often one of those expenses that people curse. It often feels like you are paying hundreds of dollars for nothing. It's expensive, and if you're lucky, you will never need it. But the day you do, you will be extremely thankful that you have it.

For more insurance information, see Understanding Insurance.