Not all types of insurance are equal

I’m a huge advocate of many forms of insurance.

You own a home? Consider insuring the house and the things inside of it.

Own a car? Consider insuring the car.

Have dependents who rely on your income? Consider life, income, total and permanent disability, and trauma insurance. 

Why do I think insurance is important? Because it helps manage some of the big financial risks to which we’re exposed. It’s a tool for managing risk.

Specifically, insurance is a great tool for managing low probability, high impact events. Insurance is great for managing the risk associated with events that could be financially catastrophic. 

There are some risks, however, for which insurance might not be the best strategy. This is especially for risks that will not have a significant financial impact if they happened. 

For example, I’m sceptical about the value of extended warranties on consumer products. If your TV packs up, it might be a hassle and a temporary setback, but will it be catastrophic in the same way that your house burning down, or you being in a serious car accident would be? No. 

In these cases, it can pay to self-insure. If something goes wrong you will need to pay the costs, whether it be repairing or replacing the item. 

In other words, there are many cases where instead of paying someone else to take a risk, it is worth taking the risk yourself. Especially for low- or medium-probability, low-impact risks.

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.