Crash Course! Optimal vs Realistic cover - Retain or Offset risk.

This is a small crash course in one of the key concepts of insurance and how this comes into play when I give clients advice.

Insurance as far as a client is concerned is basically about the decision to either Offset or Retain risk. Meaning, to either paying to pass the risk onto an insurer (Offset) or deciding to accept the risk and the consequences (Retain).

When you fully insure your car, you are offsetting the risk of you getting in an accident and the costs involved. If you A ) choose not to insure that car then you are retaining all the risks involved, if you B ) only opt for 3rd party insurance you are retaining the portion of the risk that involves the costs of your vehicle. Option B in that scenario may make sense if the value of your car is relatively low and taking this option makes the premiums affordable rather than opting for the full cover (optimal cover).

I go through the same thing with clients with personal risk. Making sure they understand the risks of not having each product so they are aware of what risks they are retaining.

This is because the Optimal level of cover may not always be an affordable option. As you may now be aware we go through a 20-30 minute questionnaire with every client so that we can give them a customised personal risk proposal. This proposal states what products we recommend, how much cover under each we recommend and why have made those recommendations. This would be what we consider your Optimal levels of cover (unless we have already discussed affordability would be key).

At this point the client may see the premiums as unaffordable and would have a significant impact on their cash flow. So affordability may result in you having to opt for a Realistic level of cover they can pick and choose what risks they will retain.

We prioritise. It may be you are far more concerned about access to the best health care so you cut out your income protection. You are retaining the risk of only being able to get accident cover with ACC or be on a sickness benefit through the public system (approx. $260 per week).

You may be earning good money at a young age so you are mostly concerned with losing the value of that and so you retain the risk of relying only on the public health system.

As long as you realise that each decision you make towards the Realistic end of the spectrum results in you retaining more and more risk then I have done my part. Knowing exactly where you stand is extremely important for any future planning.

If you what to know where you stand get in touch with me today for a free assessment