The last time you bought a car, home appliance or electronic item, what else was recommended? The extended warranty of course!
Salespeople are often stunned whenever I refuse it. My answer is quite simple: "I only insure against catastrophic loss." If my DVD player dies right after the regular warranty expires, is that a catastrophic loss to me? Of course not - I can absorb the loss myself, especially at the prices these things sell for.
If I add up all the extended warranties I could have bought in the past, I can afford to buy a new television or home appliance with the money saved every few years. I also know that extended warranties only pay out a small percentage of the premiums they collect and, on average, I save money by refusing them.
The same principle applies to deductibles. If I have a car accident and I have to pay a $500 deductible instead of a $300 deductible, will that ruin my day? Probably not but adding up all the small savings that higher deductibles bring will make a difference on my insurance premiums over time.
Deductibles serve a valuable purpose in the insurance world. Because the administrative costs of processing claims can be quite high, insurance companies discourage small claims through the use of deductibles.
This applies to property insurance of all types. It also applies to disability insurance through the waiting period which excludes those frequent but administratively expensive short term disabilities.
Deductibles allow insurance companies to focus their energies on the bigger risks and that is exactly what insurance was designed for.
Another concern I have is the use of insurance on children as a savings plan. Life insurance usually makes a horrible investment.
The best thing you can do for your children is to set up a Registered Education Savings Plan (RESP) and get the government's participation through the Canada Education Savings Grant or set up a tax-effective In-Trust Account.
Here's a plan: Break down all your insurance expenses and separate those that do not insure against catastrophic loss.
Prudently consider trimming those expenses and redirect your insurance budget toward those covering as many of your catastrophic risks as you can.
Catastrophic risk includes loss of life, long term disability, critical illness like cancer, heart attack and stroke. It also includes catastrophic property loss from fire, earthquake, flood, etc. and legal liability.
Don't entirely take my word for it. You need to work with your financial and insurance advisors to design the right risk management program without blowing your budget.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Richard is a Certified Financial Planner and owner of WealthSmart Financial Group in Richmond. www. wealthsmart.ca.
