OK, let’s say that the going is really tough; I mean financially. Remember the choices I was talking about in my post about not having any money at all? When it comes to this it is probably easier to cut costs rather than go for increasing income. What would you cut?

Just asking, because when we were in a bit of a financial pickle couple of years back, in the grips of the early state of panic, I looked at our financial statements and my eyes fixed on two types of spending: a) all spending to do with enjoyment and entertainment; and b) all spending on insurance except the absolutely necessary one (in this case car insurance).

I was wrong on both counts but would rather leave my ‘apology of entertainment and joy’ for another time. Tonight I would like to set out the kinds of insurance we really need and what to watch for – as we discovered, we can all spend less without compromising our sense of security.

Why do we need insurance?

We all need insurance because sh*t happens; and when it hits the fan we have to be protected.  If you are thinking that while this is true, the statistical probability of something happening to you is pretty slim you are wrong. For two reasons:

  • One, statistics is very good to capture trends in large populations or over large number of occurrences. It is not so hot in isolated cases. You are always one case – you die once, you have crippling accident once and your house burns ones.
  • Two, life is really unpredictable. Whether or not something may happen to you depends on so many factors; it is not enough that you are careful.

Last winter a man was killed in Sofia: he was walking to a meeting and an icicle fell on his head. He was just visiting on business and I surely hope he kissed his wife and kids when leaving that morning; and that he had all kinds of insurance. My friends’ house burned down couple of years ago; it was an electrical fault they couldn’t have prevented.

Yeah, bad things do happen and we can’t always prevent them. Our only option is to hedge against them. In simple words, it is to buy insurance.

What insurance we need?

The answer to this question will have to match individual circumstances. But as a rule of the thumb most of us need:

  • House insurance. Whilst it is always important not to overdo it we all need building and content house insurance. Even I, who frankly don’t belong to the group of people who discuss house renovations when meeting their friends, hear enough about trees falling on house roofs, chimneys falling down and houses getting damaged in variety of ways. As to content, well this one is straight forward – we all know someone whose house has been robbed in the last year; particularly living in large cities.
  • Car insurance. This doesn’t need many words – it is illegal to drive without it. What insurance one chooses to take depends on many things not least on the car. When I drove an old Fiat 126p (and no, this is not how much the car cost but not far off) there wasn’t much point in having comprehensive insurance. Given that I hit an almost new Fiat Punto backing out of my mechanic’s garage (and the car was his, and he had just sold it) it was a good thing I had third party insurance. And no, I have not been to this garage after that.
  • Life insurance. This is the kind of insurance we all hope we will never have to draw out but it is very important to have. Of course it is especially important when you have young children and other dependants; but it is not only about dependents. It is about the life you would like the ones left behind to have once you are gone. I want the ones left behind to have comfortable life; so I am very well insured. The last thing John needs if I go is to worry about money!
  • Health insurance. This one is not that important on the UK yet. I am ready to bet that it will become more and more important over the next 10 years; this is the time-frame within which I think the National Health Service will die off. On this one, I really hope I am wrong, but somehow doubt it.

I reckon these are the basics. Of course, if you are a musician you will have to insure your hands; if you are David Beckham you will need to insure your right foot.

What to watch for?

I hope that by now I have convinced you that insurance is necessary. Now let’s turn to what we ought to be careful about.

First, it is a good idea to make sure that you don’t overpay on insurance. I am speaking from experience here. We used to pay £320 ($502) per month between us on life insurance. We did this for fifteen years after which we looked around and now we pay £82 ($129) per month. Not bad given that we are older and are insured for twice the amount. We used to pay £1050 ($1649) per year on house insurance. Now this is down to £300 ($471). We did this by researching and looking at other providers (for example endsleigh cheap home insurance) and then bargaining with our current provider. Bargaining doesn’t always work and sometimes you will need to change; but it is such good fun.

Second, whilst being insured is important being over insured is not very sensible. This is the other thing we found – because we didn’t read carefully the conditions and perks of the insurance policies we ended up with a lot of overlap. This didn’t mean that we were better insured; it meant that we were paying twice for something that can’t be used twice. For instance, I didn’t realise that my pension plan includes life and accidental insurance and was maintaining separate policies. In the long run this is serious overspend.

So, do you really need insurance?

Most certainly! What and how much insurance we need, however, ought to be carefully planned to match your unique circumstances.

Just for the record, I’ll never insure my right foot or my hands.