What is general insurance?
In the introduction to insurance, we covered what insurance is, what is it for, what it is not for, and risk pooling.
And we also covered the various types of life insurance for when your ability to generate income is affected from death, disability, and illness.
Now we move onto general insurance, which is the range of insurances that are not life insurance or health insurance. For instance, home and contents, motor vehicle, travel, etc.
We’ll cover the most common general insurances, in case there is something important that you weren’t aware of. For example, because we have Medicare, many Australians don’t realise the potential consequences of going overseas without travel insurance. Or those who grew up with parents that always had comprehensive car insurance not realising that having a low-value car without comprehensive insurance (because they can self-insure) means they still need third-party-property-damage insurance.
Quick Links
Building (home) insurance
Contents insurance
Landlord insurance
Motor vehicle insurance
Travel insurance
Personal valuables
Building (home) insurance
If you had a fire and the cost to rebuild your home was $300,000, would you be able to replace it without causing serious strife in your finances for years? Most people would say no, which is why building insurance is critical to your risk management strategy.
Replacement policy vs indemnity policy
Make sure the policy is a ‘replacement’ policy (new for old) rather than an ‘indemnity’ policy (paying market value). If your 30-year-old house worth $75,000 is burnt down, and you took out an indemnity policy, you are going to have to stump up the other few hundred thousand dollars.
Defined event policy vs accidental loss or damage policy
Defined event policies only cover losses defined in the policy. This might be things like fire, flood, earthquake, explosion, and a few others.
On the other hand, accidental loss or damage policies cover all losses, as long as they’re accidental and not specifically excluded in the policy. Exclusions may include loss or damage due to:
- structural defects
- poor maintenance
- tree roots
How much to insure?
You will not be insuring the total value of purchasing your property because that includes the land value, which does not need insuring.
However, the amount should include more than just the cost of rebuilding a brand new home of the same size and what the house is made of. It should also include:
- demolition costs
- architects and council fees
- temporary accommodation costs (this is often for several months to rebuild)
Most insurance companies provide online calculators for estimating, based on the size and what the house is made of. These calculators should also include the cost of demolition and professional fees (e.g. architect, council requirements).
Generally, the benefit will not be more than the maximum of what is insured, so it is better to err on the side of caution here and be a little overinsured rather than underinsured because the difference in premium will pale in comparison to being out of pocket a very large amount of money.
Also, premiums are not proportional to coverage, so insuring for an extra 50% might only add 10% to the premiums. It is better to be overinsured than underinsured when it comes to building insurance.
Something else to beware of is that many people take out building insurance and renew it at the same cover each year even though the cost of building a new house rises over time. As a result, many people underinsure their property.
Contents insurance
This covers items that are normally kept in the home. In addition, it covers liability insurance.
It is often easier to take this out together with building insurance, which often results in a discount, only needing to renew it all once per year, and only paying a single excess when making a claim.
Renters and apartment owners don’t take out building insurance and as a result, often don’t think to take out contents insurance. If you have furniture or other items of value in your home, you should consider whether contents insurance is worth taking out. What if a tap blows while you are out, and your property gets flooded and damages all your furniture?
You need proof of purchase to make a claim, so keep scans of all receipts, photos, as well as a list of assets with current valuations.
Make a calendar notification to remind yourself once a year to take photos (or preferably a video) of everything in the house so that you have a record of the condition. Keep it uploaded to the cloud with receipts for anything over $200 with your other important documents such as on Dropbox, Google drive, Microsoft one drive.
How much to insure?
Go into every part of your house and list all items, and then estimate the cost of replacing each, and that will give you a total.
Once you have that, again, most insurance companies provide online calculators.
Legal liability
In addition to the household contents, contents insurance may also cover your legal liability for someone else’s injury, death, or for loss or damage to property caused by an accident. If you stay in a house that you do not personally have building insurance for (e.g., you are renting), and an electrical fire damages the building, the owner’s building insurance company can come after you for the tens or hundreds of thousands of dollars of damage. Sometimes liability insurance is included, and other times it is an optional extra.
Landlord insurance
Generally covers:
- Loss of rental income if a tenant doesn’t pay
- Loss or damage to interior and furnishings such as curtains, carpets, and blinds
- Theft or malicious damage caused by tenants or visitors
It is up to you whether to take this out or not. I’ve had the department of community services rent out my house to a person that turned out to be a drug-addicted prostitute and left $5,000 worth of damage. I’ve heard stories of up to about $15,000 worth of damage. If you don’t have a cash buffer or just don’t want to deal with it, then insurance might be the way to go. If you are happy to self-insure by saving up some money each month and building up a fund (and if you have a cash buffer in the meantime that you can use), that’s also an option. Just be conscious of the fact that if you self-insure, you may end up needing to pay out thousands of dollars in fixing up the property, as well as the lost rent while it is being fixed, and this is on top of all of the new letting and advertising fees to find a new tenant after that, and potentially costs taking the tenant to tribunal.
Motor vehicle insurance
There are four types of car insurance
- CTP (compulsory third party insurance)
- Covers any person that you might injure while you are driving
- Does not cover their vehicle or property (or yours).
- TPPD (third party property damage)
- Covers damage to other people’s vehicles and property by your vehicle in an accident
- Does not cover damage to your own vehicle
- TPPD & fire and theft
- TPPD plus also covers damage to your own vehicle in case of fire or theft.
- Comprehensive cover
- Covers your own vehicle for accidental damage, fire and theft, as well as damage your vehicle may cause to other people’s vehicles and property.
What type of cover?
CTP is compulsory regardless of the other insurances, and you can’t get registered without it.
If damage or loss of your vehicle will cause you financial or personal strain, comprehensive insurance may be the most appropriate cover.
Many people who have gotten their finances in order to get ahead in life have realised that a cheap car is a perfectly good option, and you can save money, not only by investing the difference and on the reduced depreciation, but you may not even need comprehensive car insurance if you can self-insure by saving up money each year for a few years.
However, if your parents always had comprehensive car insurance, which includes covering damage to the other car or anything else you hit, you may have never realised there is a separate type of insurance available for those who don’t have comprehensive insurance – Third Party Property Damage (TPPD) insurance.
If you have a cheap car that isn’t worth comprehensive insurance, and if your car hits a high-end car like a $100,000 BMW or crashes into a storefront, resulting in hundreds of thousands of dollars in lost earnings by a business owner, it could easily cause you severe financial harm from lawsuits.
There was a young guy on a forum who posted about hitting a $70,000 car, and it will take years of savings just to get back to being broke before he can start his financial accumulation. When you add up the missed compounding had that not occurred and instead that money was saved and invested for the rest of his working life, it would easily have been several hundred thousand dollars. TPPD would have avoided that.
If you can’t afford the minimum level cover that includes that of TPPD, you can’t afford to drive. Consider this a necessary cost of having a car.
Excess
Insurance overall is a loss-proposition due to some of the pool of funds for benefit payouts going to admin costs and insurance company profits. As a result, insurance should only be used for high-impact events, and that includes excess. If you can afford a higher excess (with an emergency fund or other liquid assets you can get a hold of), it will reduce your premiums while still keeping you protected if something goes terribly wrong, and overall, you will be financially better off.
Shop around
Car insurance is notorious for having lower premiums in the first year to attract new clients but increasing premiums in the second year hoping you won’t notice. In fact, you can often shop around online and even see that the same insurance you have with the exact same insurer is significantly cheaper than what you are paying. Blindly paying the increasing premiums is often referred to as a ‘loyalty tax’. Spend time each year shopping around for car insurance. Ignore the reward points, discount vouchers, etc., which is all designed to keep you with them paying overpriced car insurance.
Just keep in mind that cheaper isn’t necessarily better, so read the terms and conditions. It might even be better to take lower quotes from other companies to your existing insurer to see if they can match it or at least offer a better rate.
Tips to reduce the cost of car insurance
- Decide if you really need a new or expensive car. A good second-hand car will not only be cheaper to buy and maintain, but comprehensive insurance will also be significantly cheaper.
- Have an emergency fund so that you can afford a higher excess, which will reduce the cost of comprehensive insurance.
- Consider whether you even need comprehensive insurance. Insurance is for events that you cannot financially tolerate. If you can afford to replace it, consider whether you need comprehensive car insurance and whether it represents value for money. Many people automatically get comprehensive insurance because that is what their parents had, but this isn’t always necessary for low value cars.
If you go without comprehensive insurance, always make sure to get third-party property damage (TPPD) insurance. - Shop around each year – don’t fall for the ‘lazy tax’ of allowing the annual price hike for non-new policies to cost you more money than it should.
Travel insurance
Travel insurance covers a few different things, such as:
- Overseas medical expenses
- Medical evacuations back to Australia
- Lost luggage, electronic devices, baggage, sports equipment.
Types of policy suits your needs.
- Basic travel insurance
- Comprehensive travel insurance
While travel insurance covers theft. trip cancellations, and medical expenses, it is the medical expenses that you need to be aware of. Being in Australia and getting the highest quality medical care for free makes us unaware of the mind-boggling cost of medical costs in much of the world, and it often doesn’t occur to you before a trip that you need travel insurance against medical events.
I never noticed when I was younger, but as I got older, I took more notice of those news stories of someone who was jet-skiing or just drunk and had an injury while overseas, and the hospital wouldn’t release them until they paid some insane bill of $30,000 or $50,000 (which means they continued to rack up huge inpatient costs every day). After you notice one of these stories, you notice them again every so often. If you have a serious accident, it is entirely possible it could cost you over $100,000. It is not worth that kind of risk to save two hundred dollars of travel insurance.
Many credit cards offer complimentary travel insurance. Occasionally there will be some conditions, such as needing to purchase at least $250 towards the cost of the trip on the card, so read the requirements. You will then need to inform your credit card provider of the date you will be away, which countries, and if you are travelling with your family (who may also be covered). If you travel a lot and don’t already use a credit card, this can be a great way to save on travel insurance.
Ambulance cover
This is a form of health insurance, not general insurance, but I’m going to throw it in anyway.
Medicare doesn’t cover the cost of emergency ambulance transport. If you have private insurance with extras cover, this may be included, but if you don’t have that, an ambulance call-out can run you $1,000-2,000, which comes as a nasty surprise after you’re already dealing with whatever event occurred.
For those lucky enough to live in Queensland, the Queensland government pays for an ambulance call-out anywhere in Australia (like it should be everywhere). It is similar in Tasmania. For anyone else who is not covered under private health insurance extras cover, I’d suggest considering ambulance coverage.
Use the government’s own health fund search webpage www.privatehealth.gov.au, which includes all insurers, as opposed to privately run websites that only include health funds that pay them money to be shown there.
At about $100 p.a. for a family, if any of you use an ambulance in the next 10-20 years, it has more than paid for itself.
Personal valuables
These are things such as clothing, jewellery, electronic devices, sporting equipment, and usually cover loss or damage anywhere.
Think twice about insuring low value items
As mentioned earlier – insurance is to cover the cost of things you cannot replace yourself without it severely impacting your life.
Think carefully if it really is a good idea to insure low value items such as your laptop or your phone.
If you would be severely financially impacted by the loss and you are unable to self-insure, insuring becomes absolutely necessary. For other cases, be aware that overall, insurance is a financial loss-making position, and self-insurance is often a better option.