Unit 6a Introducing insurance
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This document provides an introduction to insurance. It discusses key concepts like pooling risk, premiums, screening of high-risk individuals, and using excesses to discourage risky behavior. It notes that insurance is about protecting against worst-case scenarios, not making a profit. The document also addresses why young people may underestimate their need for insurance due to an underdeveloped brain and provides some general tips for choosing and using insurance.
Unit 6a Introducing insurance
- 1. GENC3003Personal Financial PlanningAndrew Hingstonandrew.hingston@unsw.edu.auUnit 6: Introduction to insurance
- 2. 2Chunks of a piePlan to beGenerousPlan to beContentPlan for theFuture1. Plan to be GenerousTaxes support the communitySupport family and charities2. Plan for the future House paid off
- 3. Super for financial independence
- 4. Insurance to protect family and assets
- 5. Plan for death
- 6. Save for big expenses
- 7. Invest savings by time horizon: - fixed interest - shares, property - managed funds3. Plan to be content Manage your living expenses
- 8. The residual pie … not the first part
- 9. Focus on contentment … not upgrades
- 10. Focus on people … not possessions
- 11. Track expenses … cut back by 10%
- 12. Never pay interest … except investments4. Grow your pieCash flow from labourCash flow from investments
- 13. 3A story to illustrate insurance …Some neighbours worry about being burgled (20 houses)They expect one burglary each year costing $10,000They all pay $500 into savings account each yearThe account earns 10% interestIf your house is burgled then withdraw costs from accountExpected amount in the fund at the end of the first year:Premiums (20 x $500) + $10,000Plus Interest (0.1 x $10,000) + $1,000Less expected claim - $10,000Carried forward to next year + $1,000
- 14. 4Implications from this storyInsurance is about protecting yourself against a worst case scenarioYou are paying an organisation a fee (premium) so that they will protect you from some bad outcomeInsurance is NOT about making sure that you get more money back in benefits than you pay in premiums!Insurance companies use screening to weed out high-risk people (during application or when making the claim)Get rid of them by charging very high premium!Insurance companies use excesses to encourage people to NOT engage in risky behaviour
- 15. 5Young don’t need insurance?Section of the brain that inhibits risky behaviour is not fully developed until age 25 … some examples:“The chance of anything bad happening is just so remote”Under-estimating the probability of adverse events“I’m a good driver, I don’t need insurance.”Over-confidence and sense of invulnerability“Insurance is a rip-off. I’d rather spend money elsewhere.”Poor planning of finances and under-estimated consequences“It’s okay to bend the truth a bit on my application form”Ignorant of consequences of a rejected claim
- 16. 6Some general insurance tipsProtecting your assets and family through insurance is an important part of planning for the future!Shop around and read the fine print.Choose higher excesses (cheaper premiums) and put away some savings in case the worst happens.Choose a reputable insurer – a cheaper insurer may not pay your claim!Never lie to an insurance company – you may never be able to get any insurance again.