Adulting 101: Insurance PART 2 - BOD13

0:00The point is I say it to you, new to fine. Just, you're making me know. I'm just slowly pushing you out so that it'll just be dad. Working at heights is massive. Everything's flying around. You know, it gets a bit windy. It could be all over, right? Spoken like a true scat as well. Yeah. Hi, and welcome to the Bank of Dad podcast. I'm Kate, and this is my dad, Pete. Hello. And we're here to teach you all the money lessons we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Yep, looking forward to it. This is what now, number 13? I'm lucky for some.

0:39But not for us. It's right, we're recording on a Thursday, so we're fine. And it will go live on a Thursday. And it's not April Fool's Day, we missed that. No, that was yesterday. Yeah, at the time of recording. No hideous, what is the word? Superstitious thing is going to happen to us then today. Suprastitious? Does it say supra? I think so. Superstitious. Superstitious, no. No nasty things. We're not particularly superstitious people anyway. Not even remotely. In fact, if my mother was still here, she'd be telling us off for even talking about it. Yeah, she would. She would. What are we talking about today?

1:11So today we are continuing our episode on insurance. We started yesterday, last week. It wasn't even yesterday that we filmed it, so I'm not sure what happened there. Three weeks ago. We started talking about why you should have it. Yes. Because it sounds very adult and very boring, but we do apparently, we need it. and then today we're going to be talking about which ones to be getting and how. So when and how, yeah. Okay, it is super important, you know, it's, I think people kind of skip over this because they think it's not fun to talk about because it requires, insurance is there in case the worst happens very often.

1:48Yeah. And terrible things happen and we don't want to think about that, but unfortunately part of kind of adulting isn't it? We have to think about that sort of stuff, we have to engage on it. So it's super important. But before we get into any of that, it's time for Wanky Word of the Week. It's time for Wanky Word of the Week. Something very exciting happened before we started recording. Dad, you put in a place, a plan in place to get a button for that. Yeah, well, I think you challenged me to get it done by episode 16. Which we're filming next time. Next time. We're doing, hopefully, going to do three in this round.

2:2513, 14 and 15 today. but yeah I think I have a plan hopefully either to trigger it from a button here or maybe even just from the iPad I just think it'd be good for us to hear it because when we're going yeah currently we're vibing to nothing so this week's wanky word of the week uh we've gone for hang on pause what why do you keep doing the wanky word of the week why do I keep doing it yeah you did it in the last one no saying it the point is I say it to you and you define just you're making me null. Just slowly pushing you out so they don't just be daft. Okay. You did that on the last one too.

3:00Okay, Kate, so what is this week's wanky word of the week? This week's wanky word of the week is broker, which is such a wanky word. It's just, is it a word that we use in any other context than in finance? Probably not. No. Again, I might bring back, You know, I've said in previous episodes where it's like, I just pictured that man in a crap suit and I used the same AI made picture. Broker is the same. Yeah, okay. So, I mean, broker, you get sort of like a porn broker. That's P-A-W-N in case you're wondering. Which is sort of, you know, you sort of trade in your stuff for cash if you're a bit strapped for cash or whatever.

3:41You can, you know, take your old jewellery in and they'll give you cash for it. But then you can buy it back. Yeah. That's what a porn broker used to be. I don't even know if they still exist I'm sure they do I can't say because I follow Bank of Dad's excellent financial advice I haven't needed one yeah good so in this context a broker is generally somebody it's a professional finance professional who it's usually linked to insurance but also mortgages so basically if you've got like a ton of choice about something a broker will help you decide which is best for you so you know with insurances it'd be like okay here are a whole load of possible options.

4:18I'll find out about you and I'll sort of point you towards particular options that work for you. So it's specifically, it's sort of product led. So I would never say I'm a broker as a financial advisor. We used to be back in the day when all we were doing really was flogging insurances and investments and stuff. Financial planning is totally different. But insurance brokers, you know, their job is still mostly to which products fit best for you mortgage brokers likewise here are your needs here is your income and your outgoings here are your here are your mortgage options yeah so really i mean i think the word's mostly been replaced by advisor mortgage advisor is that why you even kind of are phasing out the word advisor in jackson's well i think in our case there is a distinction between financial planning and financial advice yeah like ordinary people I don't give a shit really about that difference, you know, but we do because we're planning led.

5:15Financial advice still is too broad for me, right? And there are all kinds of financial advisors, good ones, bad ones. The majority still are very product led. Client walks in, ah, I'm going to sell you, you know, this month we are mostly selling this fund on this platform, right? Yeah, yeah, that's a bit sketch. And it doesn't matter who you are, this is what you're going to get. financial planning is people-led, it's person-led. But a broker really is simply somebody who helps you decide from a bunch of options. And in our world, usually it's either mortgages or insurance. So that's a very loose link to today's sort of...

5:52The fact that we're talking about insurance. It is a loose link, but it's okay. And I'm going to say that it's a loose link because that was a word that you came up with. Yeah, fair enough. Yeah, fair enough. Okay, right. So let's get straight into it with types of insurance kind of being the first section, subsection of the video. What types should young people know about? Well, we're kind of skipping over what people like me call general insurance. So that's where you're insuring stuff. Like car, phone. House, mobile phone. Yeah, right. Because most people are kind of aware of that anyway. Yeah, and you know, if you are renting, you've probably got contents insurance.

6:29If you own a home, you will certainly have buildings insurance, particularly if you've got a mortgage because you have to have it. You may or may not have mobile phone insurance. And you know the deal, if you don't have the insurance and you drop your phone and it smashes, you're going to have to buy a new one. Or pay for the fix. Yeah, or pay for the fix. Whereas if you have insurance, it will cover. My old colleague, Chaz, I think three times he claimed on his mobile phone insurance because he left it on the top of his car. And he literally threw it over or something. No, he just fell off, didn't he?

6:54Because he left it on top of his car, got in his car, and drove off. At one point, he was having a phone conversation. He left it on his car, and he carried on, and then suddenly the call dropped out. and it was because it had finally fallen off and the Bluetooth had disconnected. That's so funny. So, you know, if you've got insurance for your mobile phone and it gets destroyed, then you claim on the insurance and you haven't got to cover the cost. And usually the amount that you pay monthly doesn't come close to the amount you would pay if you didn't pay for insurance and had to pay for the problem.

7:21Exactly. That's the premise of the insurance. The fundamental premise of insurance is that the premiums of the many pay for the claims of the few. So, you know, if... That's a good little tidbit, isn't it? Well, it is. It's a soundbite, right? But it's true, isn't it? You think all the people in the UK who pay car insurance, for example, versus the number of people who claim on it. Essentially, we're all paying for those fewer claims, right? But one day it might be you. It might be you, yeah. So that's why you do it. So we're kind of ignoring general insurance and we're talking specifically about what you could call life insurance.

7:56And it's like insurances where the thing that you're insuring can't be replaced. well you remember didn't we mention that last time I think the difference between insurance and assurance yes we did yeah when I did my training the difference between insurance and assurance A-S-S-S-s assurance is thank you yeah insurance is for stuff that can be replaced and assurance is stuff that can't so we always used to call it life assurance so that's kind of the stuff we've ever seen on today because you can't replace a life it's more that sort of stuff yeah yeah yeah to be honest the deep shit yeah well these days people don't care about the difference between words right So the main ones we're talking about are life insurance, critical illness insurance, and income protection insurance.

8:37These are the ones that we need to know about. So very briefly to deal with them, life insurance is very simple. It pays out if you're dead. Cool. Well, it's not cool. Thank you so much for watching. The thing is, why would you do that? Well, if you remember we talked about last time, the fundamental risk of all three of these things is that you lose your income. Obviously, if you're dead, your income is lost. You don't care. But the people who are depending on you. And if you've got debt still to pay, that doesn't die with you, right? So you might want to provide for that to be paid off. Obviously, if you're living with a partner and there's a mortgage, say, you know, it would be great if the mortgage was paid off so that your partner could continue living in the house, get used to life without you, but without a mortgage over them.

9:17With only half the income if they hadn't. Exactly, yeah, right. So life insurance pays out if you're dead. Critical illness insurance pays out if you are diagnosed with, one of a list of specified critical illnesses, right? So you can't just decide that your heavy cold is a critical illness. There is a defined list. Obviously, with any insurance policy, there's a lot of small print, right? Shock. Yeah, right? But there is a defined list. There is kind of like a master list set out by the ABI, Association of British Insurers, and then each insurance company has a kind of sub list so they can go a little bit further.

9:53They can maybe, as a point of difference between them and their competitors, cover more types of cancer, for example. Severity is something an issue as well. It's sometimes an issue. So a minor skin cancer that is, you know, sort of very localized may not be covered, whereas breast cancer, prostate cancer, or whatever it may be. So there is degrees of severity as well. It's called critical illness for a reason. It's not high-level stuff. No, it certainly isn't flu. It's the stuff that might kill you that probably won't, actually, because the other thing is for critical illness to pay out, you have to survive usually 14 days.

10:28After you take the insurance out or after the diagnosis? After the diagnosis, right? So if you could get 13 days, you won't get a payout? But yes, technically, but in the vast, vast majority of cases, life and critical illness go together. So if the critical illness bit doesn't pay out, the life will. That's true, yeah. So it's less of a... Can you get both? Yes. You can have policies that pay out on both things. So it'll pay on critical illness and when you die, those are expensive. Obviously, because it's going to pay out twice. Yeah. Or you can have what's called life or critical illness. So it's whichever comes first.

10:59So if you get a critical illness... It's a bit morbid, isn't it? I know, it is. That's why people don't talk about this. Bumming hard, guys. Bumming hard. Bumming hard, guys. Bumming hard. So if it's life or critical illness, whichever one comes first, it will pay out. So if you're diagnosed with something nasty, it'll pay then. If you're hit by a bus and there's no kind of critical illness involved at all, it'll pay then. Gotcha. And the third one is, I think, the most important. Yeah. And particularly for younger people. Yes, because the likelihood of younger people dying or getting critical illnesses is lesser.

11:33That makes the insurance cost lower though. Yeah, because you're less likely to have to pay out. Exactly. But all of us are susceptible potentially to being unable to work. And remember what we said last time, that our ability to earn an income is our biggest asset by far. our total lifetime earnings will be for most of us many times like what the value of our house would be you know you will earn millions of pounds in your career sounds nice when you say it like that but it will i mean you start on sort of i think we worked out last time you start on like 25 grand or something and you get a three percent increase it's something like two million quid over your lifetime i can't remember the exact figures right over like a 45 year career forward pay that I'm just giving you 2 million now that'd be alright and never get paid for the rest of your life what could possibly go wrong with that well I feel like I'm pretty well educated I feel like I could do alright yeah I'm not sure that's a good precedent to set though yeah earn all your lifetime earnings up front imagine the thing is that nobody would work so the thought of society would happen pretty quickly yeah it's a good idea only in the abstract yeah yeah no not in practice no it's just for me then it's a special treatment for me so the third kind of insurance is income protection and that simply pays out if you are unable to work there's a whole lot of detail under that which we'll get to so it's worth saying that the list for critical illness cover and stuff are put in the show notes yeah we'll put links to the ABI definitions and stuff perhaps as sort of the high level definitions of what makes for a critical illness so life insurance pays out if you die critical illness is if you get something nasty and survive for 14 days and income protection means it pays out if you can't work Yeah, and that's the one to really focus on.

13:13So just flitting back to life insurance, does it make sense for someone sort of in their 20s, 30s? Well, it makes sense if, I think it depends on what life stage you're at. Because I don't have life insurance. No, you don't need it. You don't own a home. No. You don't have any debt. No. I have a dog. You do have a dog. I'd look after the dog if anything happened to you. Cool. Right? So it doesn't make real any sense, but you are looking to buy a home before too long, hopefully. it's not easy i was gonna say yeah the one income in cornwall it's just yeah it's proving problematic isn't it minefield so when you have a mortgage yeah you may even decide if you're in a house on your own the house could be sold to pay off the mortgage so you don't necessarily have to have life insurance but the second there's somebody else dependent on you or there's somebody lives in that house with you yeah you would consider life insurance that makes sense so it's not necessarily about age, it's to do with life stage.

14:10Yeah. Do you have debt that you would want cleared if you died? Because debt does not die with you. Really important. Or is there somebody dependent on you? That's why you... Somebody who would be materially worse off if your income was covered because you were dead. Partner. Yeah. Right? So, what's the difference between income protection and critical illness cover? Right. Yeah. They're asked this a lot, actually. If you just, you know, skim over it, it would seem like they do the same thing yeah it does um so critical illness cover the main thing is what they cover critical illness cover is about you being diagnosed with a specific illness income protection means you are being unable to work and it doesn't really matter why that makes sense okay so it could be a mental health thing oh totally back you know debilitating Or down the stairs or something.

15:03Yeah, yeah, yeah. Or you get cancer and you're signed off for a year or whatever. Now, that would meet both definitions, wouldn't it? Well, yeah. So critical illness, you know, if you get cancer, it pays out. Yeah. Right? As long as the cancer meets the definitions in the insurance. If you happen to get a cancer which is, you know, treatable and you respond well to treatment, but the doctor says you need not to be working while you're going through this treatment, you need to have, you know, the space to get well, then income protection would pay out as well. So income protection insurance doesn't have to mean indefinite not working?

15:42No, but it'll cover you indefinitely, or at least until the end of the term of the policy, which is usually linked to your state pension age. So what that means is... You said a lot of words there that we haven't explained before. Okay. Okay, so income protection will pay you until the end of the term. When you take out an income protection policy, you choose what the end of the term will be. Term being time of policy. How long will policy last, thank you. So most people would set that until state pension age. Which is the age that your pension that you've paid for up until now comes out to you.

16:15State pension is the government-provided pension that comes out to everybody as long as they've paid enough national insurance. We've got a two-parter on pensions coming right up. Really important subject, right? But, you know, state pension, obviously it's decades away for you, but it's, how old am I? It's 16 years away for me. As the age is currently. Yes, right. So you can set income protection. So if you go sick tomorrow and you had an income protection policy, which you don't currently, something to think about, particularly when you get a property. Yeah. But if you don't, if you go sick tomorrow and never work again.

16:49that's a whole long time before any kind of pension kicks in yeah 40 odd years yeah probably 50 by the time I get there right right so how valuable would that policy be yeah very okay because otherwise I'm reliant on benefits yes income protection means you shouldn't have to be could you take both yes absolutely okay budget allowing right you know you don't want to kind of have be insured up to the hill but not be able to eat yeah no sorry I mean, as in, if you've been having income protection, then you claim on it, and for the next 30 years, or however long you can't work, can you still claim benefits with an income protection policy paying out?

17:32Depends on the benefit, because some of them are means-tested. Right, so it's some, not all. So, yes, in theory. It depends on the specific benefit. Okay. Because, I guess, you're already earning some amount. Technically, it's still earning. It's just paid by an insurance policy. So the question was, you know, sort of the difference. And the other main difference is that critical illness insurance usually pays a lump sum. So people, whereas income protection replaces your income. So you get it monthly. So, I mean, you can get some variations on critical illness, but usually it's a lump sum. People usually cover that to pay a mortgage off.

18:13Yeah. Right? you get a hideous cancer diagnosis and you think, right, I'm going to be having chemo and radiation therapy for the next 18 months. I really don't want to be repossessed while I'm going through that. Because you're not working. Because you're not working, potentially, right? So I can take out a lump sum and pay the mortgage off and at least I can't be kicked out of my house. Or some people do it because critical illness cover can be quite expensive. What some people do is I will take out a policy which pays out say three or five times my annual costs so it means i don't have to work for three or five years because i know all my costs are covered right all along some of them paying my entire mortgage off so it's a cheaper policy you can't insure an income you don't have so if you are unemployed you can't have income protection no so you can't you can't get insurance for your income after you've become unable to work oh definitely not and if you're unemployed you can't take out income protection insurance because and you can't insure an income you don't have.

19:11So if you're earning 20 grand, you can't take out an insurance and income protection for 70. Yeah. Right? I'm earning 300 million pounds a week. Yeah. Yeah. Just, you know, again, insurable interest. You can't take out insurance for something that you can't, that you're not going to lose. That makes sense. So, yeah. It's, you know, there are the deferred period with income protection. There's a deferred period. You can set how much cover you got and maximum cover is usually around about 70 % of your gross earnings. So, you know, to put that in figures, if you're earning 30 ,000 a year, 70 % of that would be 21 ,000 pounds you could insure.

19:53But of course, it's gross earnings. So 30 ,000 pounds, if you earn it, you would pay tax off that and that's insurance. You don't pay tax on income protection benefits. And just to remind you from previous episodes, gross is the amount before you lose, before tax and everything, or net pay, which is what you actually take home. That's right, yeah. I've been listening. Well done, yeah. Okay, so just because we've been talking a lot about health care and obviously critical illness and everything, is there any point in having private health insurance if we've got an NHS? Yeah, we're unbelievably lucky in the UK to have the NHS.

20:29You know, most countries don't have universal health care. As tricky as a little bit is. Well, we know it's not perfect. It's hugely underfunded, you know. But the concept is fantastic. Yeah, and it's not even 100 years old, isn't it? No, and I was just scrolling the other day. I have asthma, so I have an inhaler. It cost me nine quid to buy an inhaler. Yeah, I've got it. It's like$300,$400 per inhaler in America. I don't know what's the point of that. I don't know how you survive. And there was a woman who recently went, Fome's tweeting, about the fact that some insulin fell out the fridge. Her son put it in the freezer.

21:04$800 gone. insurance won't cover that because it's intentional property debt loss or whatever so they've had to pay it themselves which thankfully she has but if you didn't that keeps you alive but the worst thing is the guy who made the patent for insulin production sold it for a dollar to ensure that this didn't happen he doesn't get any sort of he's probably long dead now but he never made anything off is discovery of insulin. Yeah. Always production of insulin. So we are, to circle back, very lucky that we have the NHS. We are lucky that we've got the NHS. So do you need private medical insurance?

21:44Or private health insurance? This is the first time we've mentioned that. So this is different from income protection, right? Private medical insurance, to give it its proper term, PMI, basically allows you to jump the queue. Right? Right. Now, the NHS is fantastic if things are acute. If you have a heart attack or a stroke or you're in a car accident, I mean, the NHS is just unbeatable. You know, immediately into theatre, all that sort of stuff, and nobody worries about the cost because it's all free. Yeah. Unbelievable. If you need, you know, not the sort of target audience particularly, but if you need a hip replacement, right, or you need an operation on your knee because you've knackered it playing squash or whatever, you might be waiting two years for that.

22:25Yeah. Right? Because that's not emergency. It's not emergency. It's almost what they call an elective. You've almost sort of chosen to have it, right? Whereas if you had private medical insurance, you pay a regular premium, like you do for all insurances, and you could claim on that, and they would cover the cost of you going private to get your need on. And then you could get it done sooner. Much quicker, right? So it's a bit of a luxury thing, private medical insurance, to be honest. When you take it out, they will ask you about your pre-existing medical conditions. Yeah, so if you have a bunch, you're going to more likely need to claim on it, so they might not cover all the money.

23:04premium it will be more they might say yeah we'll give you the policy but we'll exclude any claims for your knee that you've already had operated on twice okay or we won't cover if there's any complications from asthma right so you always gotta be careful what you're buying with insurance but is there I think it's all about jumping the queue really so it feels like it feels like private medical insurance is a bit of a luxury thing you can get by without it you know it's brilliant but you might be waiting longer of all the things to spend money on that would be quite a way down the list of priorities I would be paying into a pension or an ISA saving for my own future before paying for PMI insurance yeah if you've got the excess after you've done those things and you consider it a good use of your money then yeah go for it yeah if there's I don't know family history and things and maybe it's a good which I mean it kind of goes without saying but the whole point of this channel is that we say it anyway you still have to like actually say all the conditions you've got when you're applying for insurance.

24:05You can't not, because that's fraud. Yeah, it is insurance fraud. I think we mentioned that last week. All insurance is built on the premise of something called utmost good faith. That's a kind of, like an archaic, old-fashioned, but technical legal term. We'll help you before to tell us everything. Yeah, exactly. We'll pay out, we'll honour our, the insurance companies want to pay out, right? It's very, it's easy, and it's kind of lazy sort of thinking you get on X. Oh, the insurance companies are out to scam you. they don't really want to pay out they do everything possible to avoid paying out it's their entire job it's 100 % not the case as well we know we speak to these insurers all the time you know it's really bad PR for them if they don't pay out on an insurance on an insurance claim right so they want to pay out yeah and so you need to tell the truth but they won't if you've lied to them they'll say well Sadiu you didn't keep up your half of the bargain yeah you didn't tell us you've got asthma and now you need a lung transplant I don't know It seems quite drastic, but I'll say.

25:05It's not linked. So they're not going to cover that. My asthma's quite mild, so I've not really considered those kind of options. Yeah, exactly. So, I mean, like transplant would be covered under critical illness policy, for example. If you haven't mentioned that you've got asthma or like bronchitis or emphysema or something, they're going to go, I don't think so. Dude, you could have told us. Yeah, or if you have had a previous cancer diagnosis and you don't mention it when you apply for life insurance, they're not going to cover you. Which is completely pointless as well because then you've just been paying into the insurance policy that you don't get any benefit from.

25:34They will not give you your premiums back. So just tell the truth. Yeah, tell the truth. I know it seems obvious, but sometimes... The whole point of this channel is to say it anyway. All right, so let's move on to now how to choose because there's a lot out there. There is. So how can we tell the difference between a cheap deal and a good policy? You know, like when you're searching for hotels and you're like, that's too cheap. That's too expensive. You know, it's the Goldilocks. How many rats are I going to be sharing my room with? Yeah, exactly. So how do we do that for insurance? Look, I think honestly with insurance, it's something to get help with.

26:16Okay. With a broker. Well, potentially. So look, complexity increases. Life insurance is dead simple. You're dead or not. If you are, it'll pay out. All right. There's not a lot of gray area there. Maybe you're dead or you're not. You know, somebody sticks their hand under your jaw and says, yeah, no pulse, you're dead. You've got a death certificate, you're dead. It will pay out. So, like, life insurance is the simplest. Are you dead or not? Yeah. That's quite rate-driven. So, in other words, you need to determine how much cover you need, like how much you need it to pay out. Okay, I was going to say, like, 25 % dead or?

26:54No, no. How much money you need based on your income and stuff. How much of your life do you need to cover? Yeah, sorry. Yeah, okay. That's a weird thought. So look, if you've got a mortgage for 150 grand, you might take out a£150 ,000 life insurance policy, okay? Once you've determined that, it's quite rate-driven. In other words, who will give you that cover for the cheapest? Because there's not a lot of grey area. You're either dead or not. No, it's different to like a car insurance policy. Not really. They all broadly cover the same stuff. A few bells and whistles, you know. You are super dead.