Too much insurance
How do you know when you’ve got too much personal insurance?
Knowing how much personal insurance you need is essential to make sure your loved ones and yourself are taken care of should something bad happen. The term “personal insurance” includes policies such as life insurance, income protection, health insurance, and trauma cover.
While nobody has a crystal ball to know exactly what the future holds (meaning that we’d know exactly what insurance we needed to establish!), there are some guidelines we can use to help determine if we’ve got too much insurance. For example, for life insurance you usually want enough insurance to pay off your debt, pay for a funeral, meet your family’s immediate costs, and leave an investment fund for your family.
There are some things that might indicate you’ve got too much cover, or in other words, you’re over-insured.
You can’t afford it
As you’d expect, personal insurances cost more as we get older.
This means that you might establish a very affordable health insurance policy when you’re 30, but by age 70 you can’t afford it anymore – because the price has gone up as the insurance company thinks you’re more of a risk to them.
This is a tough area to work through, as after paying for insurance all those years, and possibly not needing it, then you may cancel it just when you need it most.
You have insurance policies which overlap
An insurance overlap can happen in many cases, one of the most common we see being when people have more than one income protection insurance policy. Generally, this will mean that at ‘claim time’ only the value of one income protection policy will be paid out, meaning a lot of your money has been wasted paying for insurance that won’t pay out.
You no longer need it
Paying for a bunch of insurance policies doesn’t make sense for everyone.
For example, if you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer's fees, etc.), then life insurance may just be an unnecessary cost for you. Our advisers will often see people in this situation – who have built up a lot of wealth as they’ve aged, and perhaps they haven’t reduced their levels of insurance as milestones in life occurred such as the mortgage is repaid and their kids grew up and moved out of home.
What if you’re not sure?
While it’s easy to find yourself in a situation with too much insurance, it’s just as easy to not have enough. It can be hard to tell if you’re over-insured. How much insurance you need depends on both your circumstances, including your budget, and your attitudes towards the risks we all take in daily life.
What should you do?
Regularly review your needs
You should be reviewing your policies annually, or when your circumstances change. For example, if you; get married, have a child, buy a house, repay a mortgage, change jobs, or retire, you should check to see if you need to increase or reduce the amount you're insured for. Forgetting to update your personal insurances at times like this is risky and can leave you and your loved ones with inappropriate levels of protection.
You need to be very careful when making the decision that you’ve got too much insurance and need to cancel or reduce your level of cover. If you've had the policy for several years, it's likely you won't be able to get insurance on the same terms again – which makes it a really good idea to speak with a professional before taking any action.
Unfortunately, for many insurance advisers (often referred to as insurance brokers), there is a financial disincentive to advise people to reduce their insurance. Most insurance advisers are paid commission based on what they sell, with volume bonuses on top. Because of the way these commissions work, it’s likely that if you already have an insurance adviser they’re still receiving trail commission (basically still being paid) for any policies you established through them – no matter how long ago and regardless of whether they regularly re-assess your insurance needs. The amount of commission these advisers receive is linked to the amount of premiums you pay. This means if they recommend that you reduce your level of cover, or that you cancel it, they will suffer financially. As we can’t resist a shameless plug for our own services here, please note that Milestone Direct don’t pay our adviser’s commissions of any kind.
It would be our pleasure to assist you to assess your personal insurance needs. You can either: