Adulting 101: Insurance Part 1 - BOD012

0:00Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. Hello. And we are here to teach you the money lessons you were never taught at school. there's no judgment no jargon just real talk about how to handle your money we should do a disclaimer well done that was about the 18th attempt to get through that and if we're looking like we've been crying both of us we really have and this is why i'm kate and this is my dad pete hey and we are here hey shit why'd i say hey

0:45a few moments later i'm kate and this is my dad i was gonna be fine then a few minutes later and welcome to the bank of dad podcast

1:01That might be the campest thing I've ever said. Hey! We are eight minutes and 35 seconds in to do press record. That's how long we've been wiping our eyes, trying not to laugh. It's not even that funny. No, I know. It's just really made us giggle. Anyway, we're a total waste of time. We've got a lot of fun. Good fun. Okay, what are we talking about this week, Kate? Well, last week we talked about pension. No, we didn't. We talked about payslips. we did we did mention pensions but we talked about pay slips and now we are doing what i'm calling adulting 101 insurance interesting why why why do you associate insurance with adulting do you think well i'm not like seven years old going i need to make sure i have contents insurance i don't know it seems like a very adult thing to talk about and to be in control of yes you know insurance is i guess it just feels like money that's not spent on anything either sort of strictly necessary so it's not gone on a mortgage payment or paying down debt or it's not gone for a night out or a holiday or anything like that or even invested for the future it feels like money that's kind of just used in a sort of dead way i guess yeah it just kind of seems to be to to be preparing being so prepared in the sense of having insurance yeah Feels like an adult thing.

2:21Yeah, and I guess, as we'll get into it, we're preparing for some pretty grim realities. Yeah. The sort of things that, as a child, you're shielded from, hopefully. Rightfully so. But that we have to face up to as adults, so it makes sense. And even if it is super boring, this is something that's important to talk about. Yeah, I mean, it's beyond important. I think it's foundational. Honestly, it's the sort of thing that's very easily overlooked and easily ignored, because we've spent quite a bit of time talking about debt and budgeting and all that sort of stuff. We've even spent a bit of time talking about saving and investing for the future.

2:54But there is an important sort of foundation before that. And essentially, I call it the foundation because it's what everything is built on. And without the foundation of insurance, you know, the universe is a messed up place. Something can happen where all our future plans are taken away from us, all our financial security is taken away from us. So it's crucial that we talk about insurance. But before that, it's time for Wanky Word of the Week. It's time for Wanky Word of the Week. So, this week's Wanky Word of the Week is the word liability. A liability. What do you call me? A liability is like the opposite of an asset.

3:39So an asset is something you own. A liability is something that you owe to other people, really. That you owe to other people. Yeah, so it's something that's kind of like a negative, in the negative column, right? So if you own a house, then you own the bricks and the mortar, but the liability is the mortgage. And so what you actually own is the difference, isn't it? So if you've got a house worth$300 ,000 and a mortgage of$250 ,000, then what you actually own is the difference of$50 ,000. So it's important that we understand liabilities. you know most of us it's not just debt necessarily although that's the way most of it is would be expressed um but it's basically something that you are responsible for which is why it wouldn't actually be incorrect to call your children liabilities although it has a negative common connotation and you might scar them if you actually call them liability but basically i guess Yeah, it's just, you know, something that you are sort of responsible for meeting.

4:41It's almost a responsibility, really. Responsor liability. Yeah, that's what we should call it. A response of liability. So that's Wanky Word of the Week. So let's get straight into it. We kind of have a couple sections today. The first being why insurance matters. I think before we get into what it is, it's good to know why we should know about it. And then we talk about what is insurance. Yeah, we'll go into the different types of stuff next week, I think, a bit as well. So why should someone in their 20s and 30s, you know, considering that this is kind of, young people is kind of who we're aiming at.

5:19Yes, that's the audience, hopefully. Why do we need to worry about insurance? Well, I mean what I say when I call it a foundation. Look, if you're going to build a house, you know, we live near the seaside. If you built it on the sand, a very famous Bible story, actually, which you might even remember from Sunday school, about when you were little. You know, the wise man builds his house upon the rock. That's how I kind of remember it. And when the storm comes, the winds blow, the waves rise, but the house stands firm because it's built on a shore foundation. Do you think that's where the Three Little Pigs story came from?

6:00I think in any sort of belief system, in so many of these stories and parables, because they're sort of fundamental truths, right? Yeah, yeah, yeah, yeah. And in the Bible story, the foolish man builds his house upon the sand. And it just goes washed away. And so when the storm comes, the winds blow, and the waves rise, the house is washed away. And yes, three little pigs, right? So in that case, it's the construction of the property, though, which kind of messes with the metaphor. I see. The foundation, honestly, with a strong foundation, your finances, given that's what we're talking about, are much more able to cope with storms.

6:36True, you can have the most fancy house ever, but if it's built upon the sand... And the storm rises, something kicks off that you can't predict, you can't plan, then you are at risk. And so it's... Good metaphor for it. Yeah, that's kind of hit upon that really early on in the Meaningful Money sort of journey. And it's always been how I've described insurance. You kind of, insurance you pay for hoping you'll never need it. Because if you need it, something's gone quite badly wrong. Yes. But when you do need it, you're very glad you have it. It's glad it's there. Yeah, that's it. Isn't insurance just, you know, for the grown-up things, like having a house and kids?

7:15Well, yes. But insurance is about providing for certain risks. and I think your risks change with the different life stages. So if you are in your first job, still living at home, you're not paying rent, you don't have a mortgage, you don't have a car loan even, you don't have any liabilities, then your risks are pretty low. Yeah. Right? If, I mean, God forbid, if you were to die, there's nobody dependent on you. Yeah. if you are unable to work you're still living at home you don't have any major commitments so your risk then are very low whereas if you're married and let's say you're the main earner quite often there's a disparity of earnings and you've got a mortgage and you've got a car on credit and you've got two kids then if something happens to you there's a lot of people who will be impacted yes exactly so the risk is much greater and so insurance like everything with our finances needs to be reviewed.

8:19Yeah. So it isn't just for people with big risks because as we'll see in a bit, we each of us have the risk of losing our income, which is the biggest risk of all. So I have pet insurance. Yes. For my doggie. Yeah. Because she's brilliant and I don't want anything to happen to her. And I have car insurance. Yes. And I think that's it. Yeah, probably at this point. You also have some insurance provided by the company because you work for Jackson's. So if you die while you're working for Jackson's, then there is a payout. Oh, yeah. Do you remember when I was working at the school and I had to write down who got my pay if I died?

9:02Yeah. Who had your payout from your death in service. But I remember that being a funny conversation with myself. What do I do if I die? Yeah, it's funny because... I was 18 at the time too. I felt very fallible at that point. Infallible. Infallible. Immortal. Yeah, exactly. It's funny because when I think about insurance, I think about the sort of insurance in my kind of world, the sort of insurance that we might arrange for clients, life insurance, critical illness insurance, income protection. But, of course, insurance does include car, house, cover for your mobile phone, those sorts of things, right?

9:36So those are generally called general insurance. And the others which relate to you as an individual and generally come under the cover of life insurances. I think there is a distinction, actually. I'll put this a little bit later in the thing. But one of the first things I learned in financial advisor school is the difference between insurance and assurance because technically it's called life assurance. So it's a weird little, it's only sort of three letters different. Are you going to tell us the difference? Yeah. Insurance is a sort of cover for things that can be replaced. Like a car, a house, right?

10:18Yeah. Whereas assurance is covered for things that cannot be replaced, like a life. Yes, I cannot be replaced. You are absolutely invaluable. I thought you were about to say unique then. You are absolutely unique. On the scale of uniqueness. I would never do that on a podcast, clearly. I have done it once, haven't I? Yeah, you have. That's a bugbear of ours. You can't be a certain amount of uniqueness. You're either unique or you're not. That's right. You can't have relative uniqueness. I am somewhat unique. My left toe is unique. Anyway, right. Okay, so that's good to know. It's good to realise that there are aspects that are important for us.

10:49Yeah, even for our audience. Yeah, even for those, and we'll get into that. So let's say I don't have it, because I'm sure there'll be lots of people who don't have insurance. What could go wrong? Why do I need to have it? The biggest risk of all, what could go wrong is financial catastrophe. I mean like literally on the street penniless I don't know but I'm sure that this would be a large reason for a lot of homelessness because if you think about it I did the maths actually let's say you're on 25 ,000 a year and you get 3 % pay rise every year so broadly inflationary pay rise every year from 20, I think from 22 to 67, I think I did, or 68.

11:43So basically a full working career, 45, 46 years. You will earn just under two and a half million pounds. Right. Now, not many of us will own an asset worth two and a half million quid. And obviously if you are promoted, if you're a higher earner, if you get super inflationary pay rises, then chances are you could earn three, four, five, six, 10 million pounds. Throughout the duration of your working life. Throughout the duration of your working life. So your income, for most of us, our income is by far our biggest asset, or rather our ability to earn that income. Yes. And if you are suddenly without an income, well, things, you still need to eat.

12:25Yeah, me too. You may not be able to run a car, you may not be able to go to the gym, you may barely be able to eat, you may not be able to pay for your home. and so losing your income is honestly, potentially for many of us, the biggest catastrophe we could imagine, particularly if we don't have anybody that can help us out, if you don't have family that are in a position to help you or you don't have family at all. Or the relationship with family, yeah. We're fortunate in this country that there is a benefit system. But even that, it's not... Most of us couldn't live just on benefits, right?

13:00But if you are physically unable to work for whatever reason, but you're still alive, obviously if you're dead you don't worry about it but there may be people left behind who do who are impacted but the reason, what could go wrong is that it could be financially catastrophic and that's why the sort of insurances that we're talking about here clearly it's not catastrophic if you break your phone and you don't have insurance it just sucks and you are going to have to buy a new phone and that's money that you potentially didn't have to spend if you had insurance but if you fall over breaking neck on a construction site you can never work at it That is catastrophic.

13:37Yeah, exactly. Or even debilitating mental illness. Yes. That means you can't ever work again. Chronic fatigue. PTSD. There's a million things that might stop you working and you can't see them coming. And so insurance is the protection against the impact of those things. So, so important. Okay. So, yeah, no big deal. Catastrophe. It's fine. What is, would you say, the biggest myth that young people believe about insurance? You've already alluded to it. I think it's the sense of immortality, which is absolutely as it should be. Yeah, I'm young, I'm fit. Yeah, I'm healthy. Yeah, right. You know, you should kind of enjoy all that that brings.

14:17You can run a marathon or you ain't going to survive a bus hitting you. No, exactly. Or, you know, a cancer diagnosis. Yeah. It's less likely, but it's not impossible. So, you know, it's the sort of myth of immortality and sort of not being susceptible to the things that sometimes the world just throws at us is probably the biggest thing. I hear a lot of skepticism about insurance, well, it probably won't pay out as well. That's another myth. Surely it has to. What you think. As long as... All insurance is built on a principle in law called utmost good faith. So when you apply for insurance, you have to tell the truth.

15:04and the insurance company will assume you did. So the whole contract is built on good faith between the parties, utmost good faith. But the insurance companies reserve the right to check. I was going to say. Particularly if you put a claim in, right? So if it's like, well, actually, no, I did see the doctor about the lump that I found. Yeah. But I didn't disclose that on the life insurance application or the critical illness insurance. And then you subsequently put in a claim. Well, the insurance company will just say the contract's void. because you did not act in good faith. So, you know, I think, but actually the insurers want to pay out.

15:42They make a lot of money, the insurers, right? It's not about sort of protecting margins. Generally speaking, there's always outlying cases, and those cases where insurers are slow to pay out, they tend to make headlines. Yeah, that's it. But generally speaking, the life insurance industry in the UK is really, really good at paying out. Good. Right? So that's a myth, I think. The biggest one by far is sort of, I'm immortal. I'm in trouble, yeah, yeah. Bad, sorry, yeah, bad news travels fast, doesn't it? It does, yeah, just can't stop that. It's the way of the world. I follow an Instagram account and I can't remember their name, but I'll put it on the screen because it's so good and it's like good stories daily.

16:19Oh, yeah, I follow that too. It's nice. And it's like, did you know that there's these massive waves being made in alopecia research? Yeah, yeah, it's great. And I'm like, oh, I needed that today. There is good going on in the world, so it is yeah I really enjoy it I'll put it in the show notes or something because it's just it's nice to have a little yeah it is nice a nice joyous thing okay right so that's kind of I think we've talked about why we need it I think that's kind of covered hopefully yeah I'd say so so let's talk about what it is you know what does it do and is this the sort of insurance assurance thing well look it's designed to I guess fundamentally it's designed to either put you back in the position you were before the event, before the risk happened, or to provide financially if that were to happen.

17:12So house insurance, you know, if your house burns down, God forbid, then the insurance pays for the house to be rebuilt and the contents to be re-bought. All of it? Yeah. So my contents insurance is new for old. So if, you know, we were burgled and burglars took absolutely everything and we were left with just the carpets and the walls, then we could technically refurnish the entire house with brand new furniture. Does it have to be the same sort of value of what the stuff was taken? There'll always be a limit. Yeah, I can't start having, you know, customed Italian... Customed Italian furniture and sort of, not exactly, sort of branded high-end furniture.

17:49Mink everywhere. Exactly. Mink, like a bit of mink, do you? No, I'm not really pro-animal fur, but I was just thinking of Phoebe with her mink coat. Yeah, no, you couldn't do that. And there would be an overall financial limit. It's like you're insured up to£75 ,000, say, for your contents of your house. You can do a lot with that. Yeah, right. So that's like house insurance. So either designed to replace the thing, if it's insurance. Yeah, car. So it can be replaced. Yeah, yeah. And also to sort of make up financially for the impact of that risk happening. so if you cannot work because of illness or accident you need your income replacing will they do it gradually or in a lump sum you can choose income protection insurance as we'll get into probably next time I think replaces your income so you get a monthly amount otherwise you know if you said you earn a couple million in your working life to suddenly be lumped with that yes I mean you could do that, that would be very expensive to insure but generally speaking you would want a your income replaced yeah do it monthly and then life carries on as as the new normal yeah whereas if um let's say i were to die i'm the sort of higher earner between mom and me um then you know i can i can choose either for an annual amount or monthly amount to be paid to mom to replace my income or i can is it like penny for penny it depends what insurance we're talking about with income protection then no with life insurance you can choose how much gets paid out there has to be something called insurable interest so in other words I can't take out insurance on the king because there's no loss to me if he dies right it's why you can't insure children's lives because there's no financial loss that's cutthroat isn't it I know right but that's just law right so you've got to keep emotion out of the equation when you're writing laws like this yeah there's no financial laws yeah exactly the important you actually can ensure children for critical illness because obviously there may be costs involved you know if they are in a car accident and now need a wheelchair there may be costs for adjusting your home widening doors ramps all that sort of stuff so you can ensure that yeah but you can't ensure a child's life so I think you may have misunderstood I misunderstood what I meant by that.

20:17I think I didn't do a very good job of asking you that. I meant as in, if your income, you get two grand a month, will they give? Will they give you two grand a month? Yeah. Will they match your income? No, there is a maximum when it comes to income protection. It's about 70 % of your gross income. But think about that's gross. You pay tax and national insurance off that. So if you're earning it. So do you not pay the tax and national insurance? No. income benefit income protection benefits are tax free so it's not far off but you can't insure all of your income is it kind of like you've been through a lot we won't worry about you paying tax right now essentially yes yeah and because you've paid insurance premiums out of income that's been taxed already yeah you've shown yourself to be sick and also there is I think an element of somewhat rewarding you for being less dependent on the state for making your own provision because you've taken out insurance.

21:15I see, and now you're not on benefits, you're on insurance. You're going to be less dependent on benefits because you're in insurance. So I think that's a bit of a perk. It's one of the reasons why they make income protection benefits tax-free. I mean, that is a good incentive for sure. Are there any sort of classic risks? Yeah. So we're going to ignore general insurance here, house, car, mobile, phone, travel insurance, right? the main risks when it comes to us as humans are dying too early with people or deaths that are dependent on us living is your deaths don't go away when you die deaths don't die with you critical illness which is being diagnosed with something nasty and there is a list of them a sort of standardized list but surviving well you're far more likely to survive cancer than you are to die of it but having cancer clearly has implications you may need to take a year off work if you have extensive chemo and radiotherapy regime so critical illness cover isn't the same as a terminal illness cover good question no terminal illness cover very often is built into life insurance policies because it'll pay out if the doctor says sorry there's nothing we can do for you you're going to live less than 12 months because they have to be 12 months i think that's usually the figure because what normally so it would pay out pretty quickly and then at least while you're still alive you have the choice of how it gets distributed or whatever there's so much we could go into here i need to kind of keep it fairly high level but the risks are you die too early you get ill but don't die but it will impact you when you're ill or long term or you just can't work so critical illness is a very specific list.

23:00So basically cancer, heart attack, stroke, motor neurone disease, multiple sclerosis, blindness, paralysis. There's a lot of detail under these. We'll put the link to that in the show notes. Yeah, there is a standardized list. So insurers very often will add to that. So they'll have... Okay, they'll offer a few more than the standardized list. Yes, exactly. And so there is an element when you're choosing insurers of understanding which might be better than others. So if, say, you have a family risk of a specific illness. Yeah, you'd need to disclose that, but there may be some insurance that would be more likely to cover that than others.

23:35And if it's not on the standardised list. Yes, right. That's where I was going with that. Yeah, no, good shout. So dying too early. Yeah. Getting diagnosed with something nasty but surviving, that's critical illness. Being unable to work. Well, that's pretty broad, right? Yeah. But that could cover mental health, physical health. Exactly. as long as a doctor signed you off you are medically unable to work then income protection insurance would pay out what happens if you've never been able to work from that you can't insure an income you don't have so then you would be dependent on benefits yeah okay which is tough right yeah and you know for so many of us life deals are pretty crappy well yeah and there's so many sort of young people who are 17, 18 and tried work and go discover that they can't do this anxiety, whatever whatever it is and therefore then get signed off but they've never had that income they can't well exactly that's why we need to be glad we live in a first world nation with a decent benefit system and it's far from perfect right but with a decent benefit system so people can at least survive but life is going to be hard harder yeah definitely there is a sort of i always say there's kind of three slash four risk because the other one is redundancy so being forced out of work redundancy is very hard to ensure back when I first started as an advisor, there was something called ASU insurance, which was accident, sickness and unemployment.

24:53But it was never really worth the paper it was written on. I never did it because it would only pay out for a year anyway. It was a very sort of short-term thing just designed to give you space to get back into work. So your best insurance against that is an emergency fund. Yes. Which is basically the first element of an insurance program. Yeah, it's like your self-insurance, isn't it? It is, yeah. And the bigger your emergency fund or the bigger your own financial buffer, the less insurance you need, potentially. Potentially, depending on what insurance you're going for, I guess. Yeah, yeah, yeah.

25:26Okay, so how is it different having that emergency fund? Because it is. It is, yeah, but it is just an extension of it, really. So, for instance, we'll get into this a bit next month, with income protection. That's it, next month. Yeah, we're now going to monthly episodes. Sorry, everyone. We'll get into this next week. with income protection insurance you can set how fast it pays out so let's say I go sick tomorrow I can set the policy to only pay out if I'm sick for 3 months or longer right or 6 months so let's say you had you've got pretty good sick benefits I do don't look at me I don't know but let's say you are paid for 6 months at full pay from work which I think it is actually I was going to say I think that rings a bell yeah I think it might even be longer but let's just say it's six months well if you remember you can't insure an income you haven't lost so if you go sick today but your employer will pay you for six months well the logical thing to do would be to set your income protection insurance to pay out after six months so when your work pay stops your protection kicks in and because of that that's less likely to pay out which means your premium will be lower is it can you tailor that you know keep your insurance but you move jobs and that company says we'll pay for three months you can adjust your income protection to come in after three months yes but that might adjust your premium no doubt about that your monthly cost and when you say premium that is monthly your monthly payment yes when does insurance become important in life when do i need to be are there any you know set milestones that trigger having or needing insurance like having children say yes as soon as you've got something to lose, that's when you start thinking about insurance, right?

27:12So if you've got a job and you lose it because you can't work, that's something you've lost. That's something to think about insurance. So your first job, I think, and you should keep this under review. So if you change job, you should sort of think about this. So if you have a higher income in your next job, you should tailor your insurance. Oh, yeah, you need to talk to insurance. If you change your occupation as well, you should tell them right should or haft have to right so haft haft yes so if you apply for income protection insurance well you are an office worker and then change your job and become a scaffolder so suddenly you're doing manual work at heights yeah risk will be higher your premiums will raise what about if you i mean not this is a natural progression but you're an office worker and you become a brain surgeon so suddenly you're going to have a much bigger income you're what then you would need to tell them.

28:04If you didn't tell them, the insurance would stay at the same level. And that's only ever going to... It's going to be a fraction of your new income, isn't it? Yeah, exactly. So it benefits you to update them. Definitely. In that sense. Insurance provisions should be one of those things that you review. So job is definitely the first thing. A relationship, and I mean like a long term. If you're committing yourselves to each other and building a life together, then you need to think about the impact of the other person if you were to die. So, you know, if you're putting your incomes into joint accounts and using them together.

28:39Yeah, if you're buying a house together, if you're renting a place together. Yeah, you're making that commitment. It's not just... Yeah, it's not somebody you've been on three dates with, right? Let's have an insurance policy, darling. Yeah, but if you're building a life together and one of you dies, I mean, we see this, unfortunately, far too often at Jackson. We've had two new inquiries recently from people who have lost partners very suddenly. And it changes everything. I mean, you know, you're building a life, you're planning everything together and suddenly there's only one of you. And I guess...

29:09Childcare, you know, if there's only one of you left, that person's got to work, right? And so you need to pay for childcare. And I suppose the insurance means that when you're in the most, you know, emotional turmoil, you've done the thinking before that happened. Oh, yeah. Yeah, I mean, the number of times we've sort of facilitated a claim on life insurance for somebody, and we've had sort of letters or emails or whatever after the event and just said, look, with everything that I'm going through, at least I don't have to worry about the money. That's incredible. You are at your most vulnerable when you lose a partner or if you've had a hideous diagnosis.

29:51I mean, we have protocols that work for marking clients as vulnerable. It can impact your decision making massively. You're especially vulnerable to being scammed, to making bad financial decisions when you're dealing with pretty massive emotional benefit, you know, upheaval anyway. Yeah. So doing the pre-thinking, yeah. So to not have to think about something as complicated as money when all you're trying to do is get through the day. Yeah, exactly. I know my finances are going to be okay. I know I don't have to work because there's half a million pound life insurance just being paid out. If, you know, if you've got a young family and you lose your partner, you know, you can say, I'm going to take three years off work because the money's in the bank.

30:31The mortgage is paid off. I'm going to focus on just making sure my kids are okay, making sure I'm okay. I haven't got to drag myself to work every day. And then when I'm strong enough to, I can, as opposed to, you've just had this horrific upheaval. Yeah, but the mortgage has got to be paid. You've got to go to work. Your kids are just going to have to go and do childcare. Exactly. And for relatively low cost, you can provide for that. So job, relationship, I think obviously debt, certainly significant debt. So if you've got a mortgage or if you've, you know, I don't know, if you have big car finance potentially, we try to encourage people not to do that.

31:04But if you have it, if you've got debt, as we've said, debt doesn't get wiped out when you die. So you would want not to burden your family with that. So you can insure against debt that you have? Yeah. So you can take out a life insurance specifically to pay off your mortgage, for example. What about? No, I didn't. What about bad debt? Well, it's still debt, but I think you're very unlikely to be paying for insurance if you're... In bad debt. In bad debt, I would say. And I would encourage you probably not to. I would throw everything at the debt. Clearing the bad debt. You know, we talked about this with the debt snowball and all that, and building a small emergency fund first, then snowballing the debt away, then you can think about building a proper foundation to build on.

31:49Yeah. It really... You know, having an emergency fund is one thing, but being debt-free is another part of the foundation. Bad debt-free. Yeah, okay. That makes sense. And lastly is family. So, you know, you asked about the risks. The things that might trigger an insurance sort of thing. Job, relationship, debt, and family. Dependence. People who are dependent on you. My Cali dog. Yes. Although, to be honest, she'd probably forget about you really quickly. No, don't say that. And she'd be with me. No, she'll weep. She will grieve. okay please let me have this one it's fine she will also go to her pops yes exactly i will put that because in is in writing now oh it's been said aloud it's on record yes most people come to a financial advisor like me at an inflection point in life new job new relationship first baby uh inheriting losing a parent something like that or at a point of crisis so like we've had the two new inquiries recently from people who've lost their partners.