The principle behind insurance is simple enough. You pay a fee to an insurance company in return for which, they agree to pay you a sum of money if specific circumstances are met. In practice getting the right insurance cover is not necessarily complicated but it can take a bit of focused thinking. Here are some points to consider.
What really matters to you?
In an ideal world, anything which matters to you ought to be protected by insurance. In the real world you may need to prioritise. Before you can prioritise, however, you need to have a good idea of what actually matters to you, so make a list of what, ideally, you’d like to insure and then rank it in order of priority. Obviously, prioritisation is very much subjective, but if you’d like some guidance, we’d suggest starting with anything which had a pulse, then anything which allows you to pay your day-to-day bills, then anything which plays any other important role in your life, be it practical or emotional. When looking at this point, remember to think very carefully about what might be called the “hidden financial value” of any people in your life. For example, home-makers may not bring an income into the home, but the unpaid work they do still has a financial value in the sense that you would need to pay someone else to do it if they became unable to perform their usual tasks. Therefore, it can be very worthwhile to treat insurance cover for people such as home makers as being just as important as insurance cover for people who earn an income.
What specifically needs to be included in the cover?
Insurance policies are, essentially, legal contracts which means that details matter and assumptions can be dangerous. Therefore, you need to take some time to think about the real-world risks to whatever it is you plan to cover and ensure that you have adequate insurance coverage for them. This may involve taking out different policies to cover different aspects of risk. For example, if you have a home with a garden, then you may need three separate policies, one to cover your home itself (as in the building), another to cover the contents of your home and a third to cover the garden and any outbuildings. Similarly, you may want specific cover for certain items in your home, to provide a stronger level of protection than your general home contents policy can offer.
For how long do you need the cover?
It can be a huge mistake to treat insurance as a “set and forget” purchase. The insurance cover you need is a reflection of your current situation in life and as time moves on your situation may change. Going back to the home insurance example, when you first take out a mortgage, you may simply want life insurance to cover your portion of the repayments in the event of your death. That being so, in the early years, you could potentially reduce the level of cover a bit at a time as you pay off your mortgage. Later, however, if children come along, your life insurance policy may need to cover their needs in the event of your death and hence your level of cover increased. Your timespan may also change, for example if you took out a 25-year mortgage and were 7 years into it when you had your first child, you may want to extend the period of cover on the assumption that they may wish to go to university and would still benefit from help from you even if you were no longer with them.