Insurance as part of FIRE

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“There are worse things in life than death. Have you ever spent an evening with an insurance salesman?” Woody Allen

Woody was right. Insurance bores me more than budgets. But it is SO important to some people. It’s not just a solid foundation, its the rock the foundations are built on. Cock this up and you could end up in a HUGE mess.

OK. Insurance. Step 3 on the Simple FI:RE plan. This is a very UK take on insurance, so if you are living somewhere else, it’s going to be a bit irrelevant. All I can say is stick to the step and go look for a good local insurance post. I will try and find some and pop them at the bottom of the post, so check out the end!

What is insurance?

A pain in the ass. Seriously though, it is very simply buying protection against a disaster. That’s it. You are using some money you have now to hedge against a possible problem in the future, to make sure you have money then. To keep going, to buy a replacement, to fix a problem. It’s the one thing we all do in the hope we never have to use it. Because if we do, something shit has happened.

For the purposes of this, because it’s a financial blog, I am going to ignore a couple of types of insurance. Car/motor and medical insurance (in the UK). Car insurance is a legal requirement, you make the call on what level. Medical insurance isn’t needed because of the NHS. Get it if you want it, I wouldn’t recommend it as part of a FI:RE plan, especially not at this early stage, but its a choice. Just do it when you know where you are with your money and make an informed choice.

Also, I am not going to cover building and content insurance – if you have a mortgage you probably have to have building insurance, although not every mortgage requires it now. Contents – your call. Risk it or not, and if you do, make sure you cover what you need covering. Nothing worse (in my world) than finding my mountain bike has been stolen and the shed isn’t covered or the bike is too expensive. And there are still a few light-fingered little bastards out there…….

Finally, there is a type of insurance for unemployment. Like other insurances, you pay your premiums and if you lose your job or can’t work then you get paid out for a set period, often 6 months or a year. Redundancy, some accidents, and some sickness are covered, but it’s a whole bag of nightmares to get this paid out and it IS NOT cheap. I’m not covering it because, in my limited knowledge, it’s not worth looking at.

Here we are going to think about three things:

  • Critical illness
  • Death
  • Income protection

Critical Illness

Critical illness is about getting seriously ill and not being able to work. It may be for a short time, it may be forever. It may mean you have to change your house or how you live. It may be that you can go back to work, but your earning ability has gone down because you can’t do what you used to do.

Critical illness insurance pays out a lump of money if you get one of a number of diseases, although it depends on your insurer as to what is covered. Heart attack, cancer, and stroke are all sort of covered. “Sort of” because the insurer may limit it to certain types of those illnesses. A load of other illnesses may be covered. Or may not. Again, depends on the insurer. Which is why this is hard work to deal with.

There is a consumer guide to it here. Which is about as much use as…. (enter useless thing here).

Here is my problem with the critical illness cover. SOME people will definitely get these illnesses in their life. SOME of those will get them in their working life. BUT the vast majority of people who do get these illnesses get them after they have retired. So if we are thinking about this in a whole life financial plan, when we have achieved financial independence so we can retire EARLY, there is statistically less chance you will need it. 40-year-olds do have strokes, heart attacks, and get cancer. But a lot more 70-year-olds do. You need to weigh up the pros and cons. Some people go for this because it’s worth the money for peace of mind.

Death

Well, death sucks. You won’t know it, but those you leave behind know how much it sucks because you aren’t there. And if you were the one that pays all the bills, who is doing that now? Oh shit! That’s where this insurance comes in. It basically pays out when you die.

So the friendly insurance people don’t call it death insurance they call it life insurance. Because they are all nice and fluffy. Ah, bless. And life insurance can get a little complicated because there are different types;

  • Decreasing Term reduces the amount it pays out as time progresses. Good for paying off the mortgage, and reduces as the mortgage gets paid off. But in the end that may be all it does, unless you insure for a higher amount.
  • Level term stays the same amount paying out for as long as you pay the premiums. Die on day 7 or day 700 and you get the same.
  • Family Income. This one doesn’t pay out a lump sum, it pays a regular income, most commonly annually to the recipient. If you don’t need to pay off a mortgage or debt, it can help keep money coming in.
  • Whole life insurance. Covers your whole life, until you die. But everyone dies eventually, so how does that work? Well, it’s not cheap and lots of people don’t pay it all. Because you have to keep paying it forever, and people get sick of paying for things, so the insurance company keeps that cash. Ka-ching. Again, this one can get really complicated because of guarantees and reviews, so I am not going to try and explain it here.

But in very simple terms, you pay a pick an amount, your pick someone who will receive it and you pay the premiums. And when you die, they get the money.

Income Protection

You get ill or you get hurt. Income protection replaces some of your income, often for a VERY long time. Obviously, it’s not quite that simple, but that’s it in a nutshell.

There are lots of things it takes into consideration; ability to do your job or any job or in fact do pretty much any normal activity, how long you wait until you get paid out from the insurance, and how much of your income you want to cover. The longer you defer and the lower amount you get paid, the cheaper the insurance is. The difference with this to life insurance is, you are still around, and it’s you living on this money.

So what to do?

This is a tough choice. And I can’t make it for you. Insurance is as much about sleeping well at night as it is the money. A few things to think about when you make the decision are;

  • Does it matter? If you are single, no kids or dependents, you aren’t worrying about other people and it may be worth a risk and not having the insurance.
  • Does it REALLY matter? If you are the main earner and would leave a husband and kids, or be sick and them not being able to make money or cover bills, then the money is one thing you don’t want to worry about so cover it.
  • What does work do? If you have a long sick pay period, maybe you don’t need the cover.
  • Does your company pension have life cover or get? If so, no need to buy more.
  • Can you afford it? Honestly, all this insurance isn’t cheap and it is just something you may need to park for no and revisit each year.

For me, it boils down to who is around you. In my world I have decent sick pay coverage, death in service and I am not married and don’t have kids. If I died, the mortgage would be paid off and no one would be left out of pocket or struggling. So I have none of these. If I got married and had kids, and they would be left with bills to pay, then I would think differently.

The key to it is that you have to make a plan to fit your situation. Young people insure income if anything. Couples, life cover, and maybe income, depending on what incomes you each have. Families, then you may want to consider all three. Once the kids are out or you are retiring, then look at life and there is less concern about income, depending on debt and mortgages.

So that’s insurance. if you can afford it, it’s worth having. If people depend on you, it’s worth having. If you stress a lot about what would happen if you had no income due to illness or you died, then it’s worth the peace of mind.

On to the next step!

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