Chiawono’s Three Rules (Part 3 – Final)

19 Jul
You can find the first part here and the second part here.

This is the last part of the Three Rules. And probably the most tricky one. Since I don’t plan on beating around the bush, the last thing you need to prepare is an insurance policy for each of your assets. Now, why do I say tricky?

When I say that you (and I, as well) need to prepare an insurance policy for each of your (and my) assets, we need to get straight on what can be classified as assets and why insure it. We can then start from there and build a list of the insurance policies we need. But before that, with all due respect, do not discuss your insurance needs with anyone bearing the insurance company name on his / her back. Remember, unlike your emergency fund, the insurance premium is something you spend your money on. It is something that is meant to be lost (of course, for a certain arrangement of protection). Salesman (especially insurance salesperson) will sell you things you don’t need with an amount that might or might not impact your financial plan. You don’t want that. And even more, you don’t want that to happen without you realizing it. So, let’s start from the simple ones just to get the hang on this item.

1. Property Insurance: If you have your own house, then this is a must with a minimum of protection against fire. Whether you use the place or just owning it for whatever reason, you need a property insurance for each of your properties. While there is a 99% chance that you will never get the benefit from this policy, there’s a 100% chance you’ll regret not having if something happens. You don’t need this if you’re staying at your parents’ place (but they might need one, go tell them) or renting from someone else. You don’t need this as well if you’re a hobo.

2. Auto Insurance: If you use your car more than once a year, it’s a good idea to have one (for each car). Even if you don’t plan to use your car at all, it’s still a good idea to protect it against theft. And an all risk car insurance normally would only cost like 2% – 2.5% of the car price. One bump from a motorcycle to the door and you’ll spend more than that at the repair shop.

3. Health Insurance: If you’re healthy, you need it. If you’re already at a stage 4 cancer, no point in getting one. The first point is that you need to make sure that your productivity continues in a way that is not costly to your financial situation. A box of non-prescribed antibiotics costs more than a box of pizza. And a night at the hospital with doctors and medicine costs more than most three star hotels. The second thing you need to consider is that other people’s productivity and / or financial situation can be affected by our health condition as well. We also don’t want that. So, depending on your current health status, go get one!

On a side note however, most of us are salary-men. Our employers are obliged to provide us some kind of health insurance. So this is the first thing we need to check out. What’s the coverage and how big it is. Does it cover our spouse and children as well? And in the end, maybe we don’t need to get a new one.

4. Life Insurance: Now. This is the trickiest of them all. I mean, life is an asset. That’s for sure. But for whom? Don’t get me wrong on this matter. Your life is an asset. Sure, we can agree with that. But not (only) for you. Your life is (more of) an asset for your dependents. See it this way. When you lose your house or your car or your health, you still have to pay your bills and buy your groceries for the sake of your family (your dependents). But once you lose your life, you don’t have to worry about those things anymore. The worries will be inherited to your family (dependents) along with whatever your other assets are. So when we are talking about protection, a life insurance policy protects your dependents. Not you.

Several types of life insurance you might find in the market:

  • Unit linked insurance policy: Avoid at all cost. In short it’s too expensive, too useless, and pays the salesperson way too much.
  • Term life insurance policy: It’s the kind that requires you to continually ‘renew’ (by paying a certain premium which usually is bigger as you age or have increased risk) your policy every once in a while (usually annually, like an auto insurance).
  • Whole life insurance policy: It’s the kind where you pay the premium one time (or over a period of installments) and you get a protection until a reasonably old age (like 99 years old). Usually more expensive than a term life policy.

If you are too young and have no dependent at all, you don’t need a life insurance policy (YET). If you are old and have no dependent at all, you don’t need a life insurance policy (EVER). The point of life insurance, no matter what that nicely dressed young insurance salesperson say to you, is again for the benefit of your dependents once you no longer have the means to support them anymore.

In the end, those are only four out of many kinds of widely available insurance policies. You might need less or maybe more. The important thing is that you have to have a protection so that your assets don’t turn into liabilities. So the practical steps are:
1. List down your assets and decide for yourself what are the insurance policies that you NEED. I can’t help but emphasize again that you have to buy the policies you NEED. Not the ones you’re offered.
2. Find a reputable insurance agency and a reputable insurance agent and tell him your needs.
3. Open your mind for his or her suggestion but decide for yourself with regards of your needs.
4. Do not decide at the moment. Take the proposals with you and spend some time analyzing them at your home.
5. Repeat step 2 to 4 with another insurance company. Having an option can’t do you harm.
6. Buy them. Larry Burkett once give us a guidance about the amount of money you have to spend on insurance. It’s around 5% of your monthly income (if you’re paying the premium on a monthly basis).
7. This step is very very important. Many many financial planners forget forget to inform their clients about this: Do NOT do NOT forget about the insurance policies you have bought and inform at least at least a family member or trusted relative about their whereabouts. I believe believe you know why.

I guess that’s all for now. We don’t want a long post but this concludes the basic of Chiawono’s Three Rules before You Start Investing on Anything. I hope this can give all of us a start (or maybe at least a steer) in the right direction when it comes to our financial planning. Feel free to email me chiawono (at) hotmail (dot) com or just drop a comment if you have anything to ask / say / debate. But above all, help me spread this blog post around, will you?

Thank you.

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Posted by on July 19, 2012 in Chiawonomics


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