Reducing some costs (insurance)

So I’ve been looking at making some changes to life insurance and car/home insurance in order to reduce some unnecessary costs.

Besides the costs though, my other major reason to carefully assess insurance is that I don’t trust insurers will always pay out when I expect them too. It makes sense that the insurer will try to refuse claims as much as possible, since we are completely misaligned. I want them to pay, and they don’t. So we each have to prove and sadly (for me) the law is on their side since they write/edit the terms.

My largest risk for non-payment though is that either they are bankrupt (a real problem for people with investment annuities funding their retirement – run away!) or they refuse to pay out due to new terms (couldn’t get flight tickets refunded due to airline bankruptcy and apparent Covid exclusions. Strange that those exclusions only appeared post Covid and yet my policy was prior to the pandemic. Huh). This is credit risk. I don’t like credit risk, at all.

A lot of great ideas for reducing these cost are explained in one of my favourite books, Living Rich by Spending Smart by Gregory Karp.

The book isn’t as aggressive as FIRE bloggers and their 50% savings rate. I like it because it details rule of thumb ratios for all major expenses (housing, vehicles, insurance) that allow for average people to stretch their funds further. While bloggers may tell you to be extremely aggressive with insurance, ie self funding – this book starts off only at excesses and unnecessary cover. It’s like a beginner level FIRE book.

As mentioned, one of the best ways to save cash is to increase excesses or to cancel unnecessary cover. Excesses can be increased since you have savings to cover the short fall for the first few thousand rands. As originally intended, insurance should only be obtained for catastrophic events such as house, medical, vehicle theft/write off and life insurance.

However, in my case I had significant cover while still working and from when my savings were still very low. Now that my net worth would easily cover a couple of decades of income at safe withdrawal rates, I can relook at what insurance is necessary for catastrophes.

In my case the insurance departments and my thoughts on changes are:

• death or disability of a significant earner: I was the significant bread winner in our household. However, since moving on from an income plus the savings pool we have, I no longer would even qualify for the pay out. Hence it got cancelled.
• theft/fire of all household contents: I have some cover, especially for fire, but I have reduced the individually insured items (all risk cover) for things like laptop/jewellery/high value items. Not because the theft risk reduced (it didn’t), but because the premiums saved are worth more in my investments if I self insure, than paying them. Also laptops/cell phones have significant obsolescence and I’ve always had to fight to avoid being short changed by the insurer.
• third-party liability on motor vehicles: I have kept my comprehensive insurance for the vehicle, since it’s 5 years old and has value greater than 10x of the annual premiums – so not quite ready to completely remove my own theft and collision insurance and self-insure. I could move up the excess to like R20-R50k and still be comfortably insured, while reducing premiums. I’ve switched to a different insurance product whereby a significant portion of my premium is also refunded if I refill at particular fueling stations which further negates the cost.
• medical insurance: critical in our market, which much like the US requires significant cover for private hospitals. The only possible tweak here is whether to switch providers or to not build up a savings pool with the insurer. For now, the provider has been fine and cost effective, but keeping the savings with the provider is not ideal. I may move my savings away. My thinking is that should the provider ever fold due to massive claims across the whole patient portfolio (Covid?) they could end up not being able to provide savings as they have insufficient liquidity.
• life insurance: until you are significantly wealthy, or you have debt, or you have a spouse and children that depend on your income do not even think of cancelling life insurance. However, we passed all those criteria a while ago and hence life insurance no longer has a purpose. I would reconsider getting term insurance should we take on debt. The premiums saved will go towards our investment pool (which is effectively what the insurer is doing in any case).

Of course, assess each pool wisely. You may have it simply because it was sold to you, but you should also understand what it does. Again, understanding it properly will give you peace of mind that you’ll actually get paid. Since I don’t always know, I’ll rather reduce and remove insurance and self insure, but that’s just me.

Financially though, every bit of cash saved now has two benefits and why a reduction in premium will actually help you to self-insure more easily:

1. One unit of extra savings, which compounds rapidly over time,

2. One less unit of costs that needs to be replaced with investments. This equates to 12 per annum less costs, and at a 4% withdrawal/income rate a total of 300 less in capital required. Effectively this also just moves you from a 4% to a 3% required withdrawal. Highly attractive during low return cycle and it also removes insurer credit risk- ie I no longer worry whether I’ll outlive my insurer when it comes to pay out, never mind if I have to settle a claim dispute with them after arguing about terms in the contracts.

So to conclude, I want to reduce unnecessary costs due to significant savings and if I’m over insured. Secondly, reduce credit risk and self insure where possible in order to remove the risk of a claim not being paid.