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| HOW MUCH INSURANCE COVERAGE DO YOU REALLY NEED? |
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How much indeed. Chances are, you already spend too
much on unnecessary policies and too little on really important ones.
That is the view of certain behavioral economists and several insurers.
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| "Life and disability
insurance are especially important and especially difficult to calibrate" |
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| People tend to overvalue or, as the marketing folks
at the insurance companies seductively describe it, peace of mind.
This is not to say that all insurance companies are out to make you
more paranoid, but it is human nature for us to hate losing out.
Any loss, even a minor one, is too terrible to contemplate that they
compensate by buying insurance, including totally absurd policies
like air travel; when they don't even travel much in the first place. |
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The problem is that peace of mind often comes
with an exorbitant price tag. For many consumers, the price is
often disguised by the circumstances in which it is quoted. Collision
damage insurance, for example, on a rental car is quoted on a daily
basis: that modest sounding RM10 a day may equate to an annual
premium of RM1000. They may not even realise that this is a redundant
coverage as many people are already covered under their personal
auto insurance policies. Others are covered because the credit
card they used to book the rental car already provides insurance
as a benefit.
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Extended warranty insurance on consumer goods
is another example of coverage that is often overpriced or redundant.
Insurance of RM10 to extend coverage to your RM2000 stereo hi-fi
system might sound reasonable, but it is likely that flaws in the
equipment will emerge early, while the manufacturer's original
warranty is still in force.
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Personal insurance buyers will also be glad
to know that corporate insurance buyers, with multimillion-dollar
budgets to protect their employers' assets are not always more
rationale.
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Take terrorism insurance. After the September
11 incident, the want for terrorism insurance in the United States
escalated because everyone felt threatened. The insurance industry
however, decided that the risk was too ambiguous, even though the
premiums were high. The Congress then passes legislation, forcing
the insurance companies to offer it to the public and now no one
wants to pay the premiums even though it's considerably cheaper
now.
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| In earthquake prone countries, homeowners often clamour
for earthquake insurance after a significant tremor. However, buying
high-priced insurance in the aftermath of an earthquake or just about
any other large-scale disaster makes no sense from an economic point
of view. This is a characteristic of human behaviour- people buy
coverage after the cattle have gotten loose. They cancel it a few
years later because they took it as an investment, not as a protective
mechanism. Of course, that's just when the likelihood of another
event is starting to rise. |
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Flight insurance: If you fly frequently, you would have to
fly on a major airline every single day for a total of 26,000
years before you would be statistically likely to be a victim
of a crash. Besides, the credit card that you used to buy the
tickets probably provides RM100,000 in coverage. |
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Credit and mortgage insurance: These types of coverage will
payoff the balance of outstanding loans if you die. But it
is cheaper and more efficient to increase your life insurance
to cover these debts than to buy these polices. |
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Cash value life insurance (for short-term needs) and life
insurance for children: Also known as universal or whole life,
these policies offer a combination of death benefit and savings
plan. |
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This premium goes in part toward the death benefit
and in part toward a reserve that earns interest. As
the insured grows older, the portion of the premium that
secures the death benefit increases. But this type of
insurance policy produces negative returns for the first
few years, since the issuing company takes a large percentage
of the premiums paid in the first few years to pay the
selling agent's commission, as well as their own costs.
These plans only make sense if they are held for many
years, and are a terrible investment if cashed in or
voided early on. |
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Children's policies: These make no sense at all. In
most countries children are cost centres, not profit
centers- they generate no earnings that need to be replaced
by insurance. And again, these policies do not earn returns
for years. |
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The best value for your life insurance dollar
is found in term life insurance, which provides only the death
benefit, at a fraction of the cost commonly found with cash value
policies. Opt for higher insurance cover for a hospitalization
and surgical policy from a general insurance company instead of
purchasing a costly critical illness policy or a life insurance
policy with a level premium. You could invest the difference, allowing
the sum to grow in order to meet high medical expenses arising
from major illnesses, including those not covered by a critical
illness policy.
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| Advisers say that the more specific the policy, (e.g.
cancer insurance, pet insurance for veterinary expenses, refrigerator
contents insurance for food spoiled during a power outage), is likely
to be overpriced, redundant and simply unnecessary. |
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| Underinsurance is also a problem, albeit in different
lines of coverage, and with potentially disastrous consequences.
Life and disability insurance are especially important and especially
difficult to calibrate. The goal for individuals everywhere should
be to provide for your dependents at the same level as if you were
still alive and healthy, with your earning power unimpaired. |
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| So how much insurance do you really need? Always study
your situation thoroughly and never just follow what people tell
you to do. Talk to your agent and get their advice, but ultimately,
make your own decision. |
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