NZ Herald 28 November 2009

ANow, now! As I pointed out recently, these days this column probably covers KiwiSaver too infrequently, given the percentage of the population affected. Still, I admit that insurance is probably also covered too little — partly because I receive few questions about it, but also because the very word tends to make people yawn.

So the challenge is: how to make insurance sexy. The best I can come up with is to look at ways you can save lots of money on insurance — money you could then spend on romantic nights out.

Broadly, I agree with your approach. It’s common to over-insure. As a wise person once said, “If you’ve never missed a plane, you’ve wasted too much time at airports.”

For many people, it’s a great idea to have large excesses on all insurance — car, house, contents and so on. If you have loss of income insurance or similar, you can set it up so the payments kick in only after you have been off work for a few months, and the premiums will be much lower.

In health insurance, you could take an option like the $6000 excess, or get cover only for hospital and some specialist expenses, not doctor’s visits and other relatively minor stuff.

In all of these areas, every now and then you’ll have to fork out lots — perhaps several thousand dollars — when something goes wrong. But you can console yourself by thinking of your much lower insurance premiums. You also avoid the hassle of making minor insurance claims.

A friend of mine, whose health insurance covers specialists’ fees only when the appointment leads to hospitalization, recently paid close to $1000 for fees and scans that ended up with an “all clear”. She therefore had no insurance cover, but commented that she much preferred that outcome to the alternative. Having the right attitude is important.

The low-excess approach works particularly well if you are reasonably healthy and a fairly careful driver and home owner — the type who makes fewer than average insurance claims even if you have extensive cover. The average claimer will probably also win, because insurance premiums cover not only the average person’s claims but the insurance company’s administration costs and profit. But if you are unhealthy or careless, this is probably not for you.

The crucial point is to have enough readily accessible money to cover your expenses if you have a really bad year or two — which will happen every now and then.

One way to do that is to self insure, as you suggest. But make sure you’ll have enough money in that fund — or can easily top it up from elsewhere — if a really bad year happens early on. It sounds as if you are okay, but others might want to build up a self insurance fund whilst gradually increasing their excesses.

An alternative is an idea I read about in Peter Bernstein’s interesting book “Against the Gods — the Remarkable Story of Risk.” Bernstein tells of a professor he knows who, at the start of every year, sets aside several thousand dollars that he plans to donate to a charity.

Throughout the year, whenever something unexpected and expensive happens — including paying insurance excesses, parking or speeding fines and so on — he takes the money out of the charity account. At the end of the year, he gives the remainder to charity. Some years it gets heaps; others, very little. In effect, the charity pays when things go wrong.

A couple of other ways to save on insurance:

• See if your insurer offers a deal to people who have more than one policy with them. For example, some companies offer a break for having your house, contents and car insurance all with the same company.
• Some companies charge lower premiums if you take steps to protect yourself, such as installing a burglar alarm.
• Consider how much life insurance you have. While some people have too little — their dependants would struggle if they died — others have too much. If, for instance, your children are now self sufficient, or they would manage on what you leave them if you die, you might no longer need any, or so much, life insurance.

AGiven your feelings about the preference shares — coupled with the fact that no expert I respect is rushing to defend them — it would be good to be rid of them. But is now the best time to sell?

Nobody, reputable or not, knows the answer to that. We can’t forecast market movements — which will affect your interest rate and sales price.

But one of the great advantages of investments in bonds and shares, compared with property, is that you can sell them little by little.

I suggest you set up a plan to sell, say, a quarter now, a quarter in six months, a quarter in a year, and a quarter in 18 months — or perhaps spread it over a longer period.

It’s important to also think about what you will put the money into. Should you ask your advisers? My advice is similar on this — given your feelings, move on to someone else. I hope to be able to give you some help in how to choose a new adviser in this column in two weeks.