Insurance plays a major role in a typical household’s budget. Anyone trying to live more frugally should thus pay some attention on optimizing his insurance package.
|Disclaimer:I am not an insurance expert. This expresses only some ideas for thoughts I collected and is not a recommendation. Everybody should additionally do his own research and has to make his/her own decision dependent on individual circumstances!|
Let me start with some facts that I collected about insurance:
- From all collected premiums insurance companies need – depending on the type of insurance – about 20% to cover their administration costs.
- Listed Insurance companies will need some of their premiums to generate returns for their shareholders. Mutual insurance companies don’t.
- Brokerage can make up to 10% or more of your premiums. Typically it is deducted in the first years from you premiums, thus the first (and most valuable years) will not yield many investment returns for you.
- In certain insurance types, e.g. personal liability, up to 20% of claims that are paid arise from costs for fraud (somebody telling the insurance he sat down on someone elses glasses etc.).
- Insurance companies earn additional money on investing your premiums, especially in long-term insurance like retirement schemes, health or life insurance.
- All in all, only about 60-70% of paid premiums and investment returns go back to insureds on average. The remaining 30-40% are the overheads (administration, claims regulation, brokerage and profits)
- Obviously premiums are to a certain degree calculated by looking at the average insured, thus you gain (on average) if you are a bad risk, and you lose if you are a good risk.
- Especially in health insurance, often new (cheap) tariffs are set up to attract new customers, while older tariffs are increasing in price quickly.
- In health insurance premiums will rise significantly with age and about 70%-90% of the costs incurred arise in the last 5 years of an insured’s life.
- Demografic shifts might force insurers to increase premiums significantly should the portfolio of customers grow too old.
Studies show, that most households are wrongly insured, very often they insure against things they could easily pay on their own and sometimes they miss out vital insurance.
I will not put up a list of necessary insurance, there is enough of that in the web (but please don’t ask your insurance broker, he might be the wrong guy for an objective answer…;) ).
But I would like to state a general principle that is always worth considering:
One might keep to the rule to insure only against things that can severely impact one’s financial well-being (or the families’).
Lets put an example:
- Health insurance is anyway obligatory in Germany. But it also makes sense because getting ill can indeed hurt your financial position severely – indeed it could even ruin you in an adverse scenario.
- On the opposite, I’d never buy travel cancellation insurance. If you really have to cancel a flight that might be unfortunate for sure, but the couple of hundred bucks will typically not be killing. And over the years and the many flights you take you can pay a hit or two from the saved premiums, and you save on the overheads of the premium as well.
The same idea holds true for deductibles:
- I’d almost always prefer higher deductibles. On average you will save costs, because again you don’t have to pay the overhead for the premium difference.
- Additionally, tariffs with higher deductibles are typically much cheaper, because the insurer expects that people with high deductibles will behave more carefull and thus insurers expect lower claims (this is called moral hazard in economics).
- A third effect is that tariffs with low deductibles often attract indeed those people who think they will need the insurance (because they do extreme sports, drive like crazy or what not). Again this effect (called adverse selection) will increase premium costs in these tariffs.
- Especially in health insurance most people do the wrong thing: They start over with low deductibles when they are young (b/c then insurance seems cheap – especially in Germany if you compare to state-insurance) and they increase deductibles when they get old because they cannot afford the premiums anymore. Would be wiser maybe to start over with high deductibles from the start and stash away the saved premiums for later use.
- In health insurance one could choose a high deductible and kickback-schemes and then do all the check-ups, dentist and other non-urgent things every two years only, thus getting the kickback every second year.
|This year I was optimizing Woodpecker’s family insurance. I changed my health insurance away from the superfluous luxury tariff with very low deductible that I was talked into some years ago (thus my tariff was probably affected by moral hazard and adverse selection) to a more normal tariff with very high deductible. The nice lady at the phone did not understand my choice and tried to convince me that high deductibles might get expensive. Funny thing is, that the saving on premium actually was higher than the new deductible!
My takeaway: If your broker or insurer is not happy about a change that you request, then in most cases it is a good idea to do exactly that change!
Germany: State health insurance vs. private health insurance
While private health insurance advertises better quality of services they come with some disadvantages, at least in Germany:
- While being cheaper when you are young, there is a high likelihood for massively increasing premiums in your retirement age – while state insurance is for free once you retired.
- Uncertainty how the insurance company will be able to cope with demographic change.
- You cannot easily switch back to state insurance or to another company.
- Children do cost separately whereas they are free in state insurance. Makes a big difference that people often forget to consider when insuring in their young years.
All in all I’d be careful committing to private health insurance, and if, then take care that the portfolio of the insurer is not over-aged and that you maybe choose a mutual insurance company that saves on profit costs.
In general I prefer to invest my savings on my own, makes my more flexible and saves on overhead costs. However, this is only an option if you can keep the discipline to not touch your savings and if you feel comfortable managing them yourself.
If not, you should consider the following:
- You might want to be sure your company is still there in 30 or 40 years of time.
- You might want to ask yourself if you belief in the security of bond-investment, which might suffer especially in inflation scenarios or if you might prefer stock investments (real values).
- Check carefully the amount of brokerage you are paying and the reliability of assumptions in the tariff. Check independent resources, like Stiftung Warentest in Germany even if they cost something. Remember that all consulting that comes for free might indeed hide its costs somewhere else.
- Invest some time in your decision, as you will be stuck with these policies for a long time.