Insurance... how much to buy?

[Howdotheyriseup?]

As part of my attempt to buy a house... I'm also discovering a world of insurance I didn't really know existed.
I'm being offered life insurance, critical illness insurance & now even income protection. If I bought it all - I'd be spending >10% of my mortgage on insurance... that doesn't feel like the right amount to be spending on insurance...

The income protection looks like a particularly bad deal, probably because I'm in a higher-risk job.

But am I being a bit blase about all this? Any considerations people would flag? Possibly it makes more sense to get insurance for just the higher earner in our family?

There was a Mr Money Mustache piece a while back talking about how he doesn't buy health insurance - which struck me as either daft, a particular reaction to the madness of US healthcare, or possibly fine because he's really rich.

[bill1827]

Insurance is a gamble with the insurance company as the bookies. (And a lot of insurance is just a straight forward rip off.)

You need to assess the risks and work out if the insurance is worth it for you.

Building insurance will be mandated by the mortgage company if you are borrowing, although you don't have to use the insurance offered by them.

The most basic life insurance is worth it if you have dependents, it's fairly cheap.

I think the others are ripoffs, but that depends on your job security and your tolerance of risk.

Also, be very circumspect if these are being offered by parties to the purchase; conveyancers, estate agents, mortgage providers etc. They all have a big commission incentive to sell these things. If you do decide you need insurance shop around for yourself, you will get much better value.

[Affable Bear]

I bought in 2018 and had the whole sales pitch regarding insurance, quite aggressively sold down your throat as well. Ultimately as Bill1827 mentions its down to your risk tolerance and what buffers you already have in place.

In my opinion income protection probably a waste of money if you are following the MMM lifestyle as you should have a small pot to cover your expenses, if you do lose your job those expenses should be pretty low (if you are saving a large % of your income). This is especially true if your partner could comfortably cover all of your expenses (will suck for a bit) until you get another job.

The main thing with insurance is you can always say ‘if this happens you will be glad’ but if the chance of ‘that’ happening might be 1 in 1,00,000 over 40 years, would it be worth paying £40pm on covering that risk when you already have £X in the bank, death in service etc.. You have to weigh up the risk, the cost of the cover (compounded if you would invest the cost otherwise), impact on your family to get your answer!

One annoying thing I find about insurance products are all the exclusions, when we were looking at life insurance there were quite a few things that that they did not cover. From memory there were some specific cancers on there and quite a few others meaning if you died as a result of any of those the policy wouldn’t pay out, before this I thought life insurance was life insurance, you died not through natural causes you get paid out. These exemptions vary from policy to policy but often in smaller writing where you might not notice, if you buy life insurance I would definitely check what is covered!!

Not sure if you can tell but I hate insurance in general!! But it can be a good tool to manage risk and exposure. Currently we don’t have any life insurance, income protection, injury insurance etc… I am 32 and work at a University, Partner is 27 works in manufacturing as a maintenance engineer, we can both afford all of the household expenses on one income if needed and we currently don’t have any children. We both have generous death in service benefits of 4 times income. For us, our main reason for not purchasing insurance is the fact we can both cover expenses on one income, work in different sectors, death in service, insurance exclusions and we are still relatively young and healthy. We are planning on children soon and we might consider life insurance for additional protection but I don’t think we would really bother with anything else.

[Howdotheyriseup?]

Thanks for the replies. Yes our mortgage broker accidentally/honestly (?) left the commission he gets on the policy docs. £5k + a monthly amount for as long as we keep policy... so definitely will shop around.

Stupidly I hadn't realised it was relevant that we bought the house intending to manage (just*) on 1 income. So actually probably don't need to insure for full value of house.

My wife already has some cover through her work, so probably only really makes sense for me. Dependents will be here in near future so think I should at least get life + critical illness cover. The critical illness seems much more likely (and probably more expensive) so seems worth adding that on as thats a risk that would be harder to cope with.

Agree with affable bear about hating insurance. We aren't going with contents insurance because our stuff is cheap and i dont want to deal with insurers.

[vand]

My approach to this is to decide how much you want to spend on insurance and then buy the best and most appropriate insurance you can for that givne budget.

I would recommend you ignore the recommendations of mortgage brokers - selling insurance together with a mortgage is an easy sell for them and generally very lucrative, and if you listen to them you will come away with the impression that you need a very comprehensive level of insurance... and that just isn't so, in most cases. You can easily end up spending a few hundred quid a month on insurance, and you end up resenting it because it costs you so much.

Worth checking too what insurance your employer may provide - many provide death in service and accident coverage.

Start low and if you feel that its inadequate you can always increase your level of cover when you want.  They will try to upsell you on the premise that it's cheaper to buy insurance when you are younger, but a year or 2 really doesn't make much difference at all, so don't let them push you in that direction.

[bownyboy]

When we took our our mortgage 13 years ago, we initially had some income protection that covered the mortgage payments and also decreasing level term life insurance on the mortgage and that was it.

After about 2 years we ditched the income protection as we realised we had saved and invested enough to cover us, plus with two incomes and no dependants we were comfortable in covering our expenses.

Now we try and pay as little as possible for insurance. I always ramp up the excess on any insurance to lower the payments. I'm only really expecting to ever claim for catastrophic loss eg: house burns down or car is written off. We self insure for everything else.

[MisterA]

Worth checking too what insurance your employer may provide - many provide death in service and accident coverage.

Very true. My employer will pay about 9 months sick pay, and the death in service is over £1m. The problem would come if you had some sort of personal (not business related) accident that left you incapacitated permanently. You'd get sick pay, then loose your job and likely not work again.

Now we try and pay as little as possible for insurance. I always ramp up the excess on any insurance to lower the payments. I'm only really expecting to ever claim for catastrophic loss eg: house burns down or car is written off. We self insure for everything else.

That's our approach. Insurance is for emergencies, the frilly extras aren't really necessary.

For the house, buildings and contents, making sure both are for the correct value of cover, then we get the cheapest policy from the comparison sites.

[Brit71]

It should, but often doesn't, depend on the savings you have - and whether it can cover the loss

Unless you know something that the insurance company isn't asking or are intent on fraud, almost all of us will be on the losing side of insurance - but that's not why we buy it.  We buy it (or should buy it) to cover for costs that we wouldn't be able to cover if we suddenly met with that expense

So I don't have funeral insurance because my savings (and my wife's savings) would adequately cover it.  I don't have contents insurance for the same reason.  I do have (historical and employer) life insurance but shouldn't because my wife will get my SIPP when I die which should make up for lost income.  I don't insure my wife's life as our savings will cover the loss of her income.

I used to have a lot of these before because I had lower savings.  I saw giving up the insurance policies, or self insuring, to be an interest payment.  Every few years I will have to pay out, but over the long term I should be ahead.

However I have buildings insurance despite having paid off my mortgage because replacing the house would severely deplete our savings.

There is some insurance you may want to take out as a way of managing monthly expenses.  I probably shouldn't have pet insurance, but vets bills can be quite lumpy.  But I will pay a price for this.

This is also why you should max your excess if you can.

[FireSeekerLondon]

Just wanted to add my two cents about income protection insurance.  Proper income protection insurance is also sometimes referred to as Permanent Health Insurance and is designed to protect you if you cannot work due to illness or injury.  The length of time it pays out for depends on the policy.

I developed an untreatable, incurable illness in my 40s that means I am unable to work and have been for the last few years.  I will probably never work again.  My income protection policy pays me a percentage of my pre-illness salary until (a) I return to my own job; (b) I reach retirement age; or (c) die.Because I had this policy I am able to live a very comfortable life and have no financial worries, which is great because I have a lot of health worries.  This is the scenario where income protection comes into its own.  It's very hard to self-insure against the risk of long term illness, and if you have done it, then you are FI already.

[Brit71]

Just wanted to add my two cents about income protection insurance.  Proper income protection insurance is also sometimes referred to as Permanent Health Insurance and is designed to protect you if you cannot work due to illness or injury.  The length of time it pays out for depends on the policy.

I developed an untreatable, incurable illness in my 40s that means I am unable to work and have been for the last few years.  I will probably never work again.  My income protection policy pays me a percentage of my pre-illness salary until (a) I return to my own job; (b) I reach retirement age; or (c) die.Because I had this policy I am able to live a very comfortable life and have no financial worries, which is great because I have a lot of health worries.  This is the scenario where income protection comes into its own.  It's very hard to self-insure against the risk of long term illness, and if you have done it, then you are FI already.

I do have income protection insurance on salary sacrifice. As I'm in my early 50s the question would be one of early retirement, can I retire before accessing my SIPP with the other half working? It would be uncomfortable and more risk than I'd like (which is why I'm still  working) but probably could be done. But it's set in stone for the next nine months so I don't need to weigh it up.

[Howdotheyriseup?]

Thanks others for sharing their experience -  @FireSeekerLondon - sorry to hear about your illness, that's definitely the risk that worries me most.

Another stupid thing I forgot is that if I die... my wife gets what I have saved into my pension. Not sure why I thought that money just vanishes. So need to factor that in to how much to insure for.

I looked into it a bit more and apparently my employer provides me with income protection insurance due to illness... so I will get 60% of my salary (or XXXX/month - whichever is lower) until retirement age if I become too unwell to work. So should be covered for that provided I stay with my current employer. So basically I think I just need some cheap as chips life insurance because oddly my work cover for that is very small.

[Brit71]

Thanks others for sharing their experience -  @FireSeekerLondon - sorry to hear about your illness, that's definitely the risk that worries me most.

Another stupid thing I forgot is that if I die... my wife gets what I have saved into my pension. Not sure why I thought that money just vanishes. So need to factor that in to how much to insure for.

I looked into it a bit more and apparently my employer provides me with income protection insurance due to illness... so I will get 60% of my salary (or XXXX/month - whichever is lower) until retirement age if I become too unwell to work. So should be covered for that provided I stay with my current employer. So basically I think I just need some cheap as chips life insurance because oddly my work cover for that is very small.

On the pension, I went through this exact experience when my wife died

When I got custody I claimed her pension which was provided to me by bank transfer. This was a defined contribution personal pension and not work related.  I had helped her set this up and transfer existing schemes to it so knew all the details, so this will be important.

If it's a work related pension make sure your beneficiary details are up to date, although I have no direct experience of claiming for a work schene.

Have a will in place, in my opinion this is more important than life insurance if you have any assets, and if you stay frugal this time s a certainty.