This document provides an introduction to insurance. It discusses key concepts like pooling risk, premiums, screening of high-risk individuals, and using excesses to discourage risky behavior. It notes that insurance is about protecting against worst-case scenarios, not making a profit. The document also addresses why young people may underestimate their need for insurance due to an underdeveloped brain and provides some general tips for choosing and using insurance.

1. GENC3003Personal Financial Planning Andrew Hingstonandrew.hingston@unsw.edu.au Unit 6: Introduction to insurance

3. Super for financial independence

4. Insurance to protect family and assets

5. Plan for death

6. Save for big expenses

8. The residual pie … not the first part

9. Focus on contentment … not upgrades

10. Focus on people … not possessions

11. Track expenses … cut back by 10%

12. Never pay interest … except investments4. Grow your pie Cash flow from labourCash flow from investments

13. 3 A story to illustrate insurance … Some neighbours worry about being burgled (20 houses) They expect one burglary each year costing $10,000 They all pay $500 into savings account each year The account earns 10% interest If your house is burgled then withdraw costs from account Expected amount in the fund at the end of the first year: Premiums (20 x $500) + $10,000 Plus Interest (0.1 x $10,000) + $1,000 Less expected claim - $10,000 Carried forward to next year + $1,000

14. 4 Implications from this story Insurance is about protecting yourself against a worst case scenario You are paying an organisation a fee (premium) so that they will protect you from some bad outcome Insurance is NOT about making sure that you get more money back in benefits than you pay in premiums! Insurance companies use screening to weed out high-risk people (during application or when making the claim) Get rid of them by charging very high premium! Insurance companies use excesses to encourage people to NOT engage in risky behaviour

15. 5 Young don’t need insurance? Section of the brain that inhibits risky behaviour is not fully developed until age 25 … some examples: “The chance of anything bad happening is just so remote” Under-estimating the probability of adverse events “I’m a good driver, I don’t need insurance.” Over-confidence and sense of invulnerability “Insurance is a rip-off. I’d rather spend money elsewhere.” Poor planning of finances and under-estimated consequences “It’s okay to bend the truth a bit on my application form” Ignorant of consequences of a rejected claim

16. 6 Some general insurance tips Protecting your assets and family through insurance is an important part of planning for the future! Shop around and read the fine print. Choose higher excesses (cheaper premiums) and put away some savings in case the worst happens. Choose a reputable insurer – a cheaper insurer may not pay your claim! Never lie to an insurance company – you may never be able to get any insurance again.