Paying for insurance is no fun — but you need it
Bermuda Fundamental Financial Review Series (BFFRS) — Risk Management: Part 5
We are taking a leap over the BFFRS series on debt, credit and mortgage issues to focus on risk this week.
It has been a little over ten years since Fabian trashed this tiny island. “Time heels all wounds,” they say. More often, time diminishes the importance of a serious catastrophic episode. Our minds simply cannot cope otherwise.
Thus, insurance policies may have been allowed to lapse, or are inadequate for another major storm. Hurricane season is a few short months away, but can we beat the odds, yet again for another year?
During Fabian, almost everyone suffered during the blow and in the devastating aftermath. Truly, Bermuda residents were amazing: putting on a brave fronts, scrambling to help their neighbours, tying down roofs, transferring huge amounts of precious water to those whose wells were contaminated. Weeks wore on. “Life was supposed to return to normal”, but not having access to basic necessities makes for a very long workday. I could see the exhaustion on the faces of my colleagues, clients, and friends. We felt sadness for those lost. We survived — most of us, but many faced long-term financial rebuilding challenges. Their homes were not fully insured; some had no insurance.
Perceptions of Little Value.
There are two prominent issues that always come up when insurance is discussed. The first is personal as in — how many times have many of us written out a cheque (or transferred by internet exchange) for an insurance policy, thinking all the while, “Do I really need this? After all, my house is made of thick stone, there is hardly any wood in it, I could really use that money for something else.”
The second is the perception of value received. One often hears comments such as, “just exactly what do the insurance companies do with all that money?” We think that they have few claims and those reserve dollars just pile up, making shareholders rich. Insurance companies are regular businesses, producing and selling a product that almost everyone needs and subject to the same economic laws of supply and demand.
What is the Price of Your Emotional Well-being?
Is insurance expensive or inexpensive, relative to what you get? Certainly, there is no thrill in purchasing that annual premium, not like there would be in buying an electronic entertainment centre, taking a trip, or a very expensive car! All of those items, by the way, cost a lot more than just a few annual premiums.
Insurance is for the times that aren't fun: when you are at your most vulnerable; when your mental and physical state has been totally devastated because you have lost your best friend or cherished spouse (life insurance); when you are diagnosed with a life-threatening illness (health insurance); when your home, your place of security and refuge, has been turned from one of tranquility and safety into total chaos (property and casualty insurance); or when your contingency cash flow might not be at its best (business interruption insurance).
When disaster strikes, who has $5,000 — $200,000 to fork out at a moment's notice to completely overhaul your wardrobe, repair a roof, rebuild a cottage, restock a store, or clear a path to your front door? What is the cost to you in mental anxiety, physical stress, loss of sleep, loss of livelihood, and loss of control? How do you measure any of those effects? You can't, but having insurance coverage goes a long, long way toward recovery of a normal life.
What does a general home insurance policy cover (or not)?
More than you may realise. Buildings, blinds, swimming pools, paths, patios, driveways, fences, gates, internal duct work, cables, meters, fixtures, fittings and so on. Perils (another name for risk, hazard) covered are fire, explosion, lightning, smoke, earthquake, hurricane, cyclone, tornado, windstorm, sea flood, riots, civil commotions (what are those?) strikes, labour or political unrest, malicious persons or vandals, falling trees, aircraft, aerial devices, impact of vehicle or animal (think of all those cars ploughing through stone walls on Harbour Road), freezer contents, valuables, loss of money (tourists with a capital T are robbery targets), loss from fraudulent use of credit cards (identity theft) and more.
Policy coverage also includes the cost of rebuilding from soup to nuts, architects fees, surveyors, legal fees, building regulations and government statutory costs, glass breakage, clearance costs, demolishing hazards, rent and alternative accommodations (a percentage of the amount insured) and so on.
Insurance is designed for contingency measures, not permanent solutions. You cannot check into a hotel, live like a queen (king) for six months while your home is being rebuilt, nor can you construct a new house twice as large as the old one. In general, insurance coverage is predicated on the sum insured, a term meaning what amount did you insure for? Many homeowners may find out that in today's construction environment, the replacement value of the home they insured originally is nowhere near the construction cost of a new home today — estimated at mere average of $450 per square foot.
Insurance is part of financial planning for a secure future. Surrounded by daily reminders of the fragility of our finite world, whatever your position — as soon as you are able, now is a good time to review your policy coverage to ensure that you are protected. For those of you not able to afford property and contents insurance, please consider working with an insurance agent to plan for bare minimum coverage. It is better than having none.
Next: dig out that homeowner and tenant's policy because I have a few questions for you. Let's see if you know the right answers.
Martha Harris Myron CPA PFS CFP JSM; Masters of Law: International Tax and Financial Services; PondStraddler* Life™ Consultancy. Focused Cross Border Financial Planning, Publications & Integrative Presentations for internationally mobile individuals and businesses.
* PondStraddler. A person with one foot on each shore whose heart resides in both countries.
This article is the expresses the opinion of the author. Under no circumstances is the general information contained within to be construed as tax advice, recommendations for insurance, investment products, a financial plan or related advisory services. Individuals should seek qualified professional advice for their personal finances.