When you think about it, cellphones are capable of some incredible tasks. The device that you’re probably reading this on allows you to share your thoughts and experiences with anyone in the world, to access the answer to almost any question, and (my personal favourite) to arrange for a pizza to be delivered to wherever you happen to be.
On the flip side though, they are pretty terrible at keeping their screen intact when dropped, not getting stolen or continuing to work after you’ve spilt water on them. This is why I’ve had cellphone insurance for as long as I can remember. However, my thinking changed this year and I ended up removing my cellphone from my short term insurance policy.
My change of heart around cellphone insurance is part of a larger rethink I have gone through around insurance. Not only do I no longer insure my cellphone, I choose not to insure my Kindle, my GoPro or my Nintendo Switch. I also decline the option to insure my DSTV decoder, and I have no interest in buying scratch and dent insurance for my car or insurance for my tyres. Finally, I have also chosen to increase the excess on my car and my wife’s car to R10,000.
I have decided not to insure small(er) risks. My personal definition of small risks is anything that would cost me up to R10,000 to fix or replace.
Why though? Isn’t this a fairly risky decision – especially coming from someone who works in insurance?
It’s important to remember why we purchase insurance. Insurance protects us from big risks that could result in us or our family facing financial ruin. That’s why it’s important to have life insurance for your dependants, to have medical aid, to insure your car and to have insurance that would pay out if you were no longer able to work. These are the kind of events that could result in financial ruin. Compare these events to having to replace your cellphone because it was stolen. While the cost of replacing a cellphone might make your eyes water, it’s not in the same league as the bigger risks listed above.
My wife and I have made a deliberate decision to make sure that we have insurance for all of the risks that could ruin us. For smaller risks that may be unpleasant but we could otherwise get through if we had a plan in place, we consciously choose not to buy insurance – we self-insure these risks.
How you choose to spend your finite monthly earnings is ultimately a decision around trade-offs. By not purchasing cover for smaller risks:
- I am able to afford insurance for the big risks. I am definitely biased because of where I work, but the impact on me if I am unable to work and earn an income because of a disability is far, far greater than the impact of having my cellphone stolen. If I can only afford one, and I have to choose between insuring my income against disability and my cellphone, I will always choose to insure my income.
- I am able to save and invest more. Every rand I save on not purchasing insurance for smaller risks is a rand I can save or invest for the future. It’s important to remember that insurance is around transferring risks to an insurer – insurance is not an investment. Because an insurer has to price an insurance policy to cover the cost of claims, as well as to cover their expenses and make a profit, insurers expect to collect more in premiums than they pay in benefits, on average. This isn’t a problem if the risk you are insuring is too big for you to bear on your own. However, if the risk is small enough for you to self-insure, then insurance can represent a poor allocation of your finite earnings.
At this moment it’s important to point out that your own definition of what constitutes a small risk is entirely linked to your own personal circumstances and preferences. Your cut off point for small risks may be well in excess of R10,000, or it may be much lower.
Also, if you decide to self-insure a certain risk, you must have a plan in place to manage the risk of that event happening. An emergency fund, held in cash that you can access within 24 hours, is essential in protecting you against small risks. You effectively have to behave like an insurer if you choose to self-insure risks, by holding a cash reserve against the risk of these events. Some of the money you save could be transferred into your emergency fund.
I’d like to end with a practical example that I hope will illustrate the points I’ve tried to make above:
- We were paying R1652 per month to insure my wife’s and my car with an excess of R3,500.
- When we increased the excess to R10,000, the monthly premium dropped to R1,220. This is a saving of R432 every month (or 26%)
After 15 months, the premium saved would total R6,480, which is just less than the increase in our excess. If the savings were transferred to our emergency fund every month, we would fairly quickly have saved up enough money to fund the increased excess that would apply if we were in an accident or if one of our cars was stolen.