Not all types of insurance are equal

25 May 2016

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.


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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