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VIEWPOINT: Self-insurance is often best

Don’t spend on unnecessary insurance and grow your own insurance fund investments.

Let me start by saying that this piece is not about a stokvel. While the principles might be similar, I can’t say I have family and friends that I trust enough. However, if you do live in a community where you are able to pool resources, why not do so?

Last month I encouraged you to insure only what you can’t afford to lose and to stop paying unnecessary insurance premiums on luxuries and immaterial items.

If you’re bold enough to do so, keep track of how much you’re now saving every month by not paying these premiums anymore. What you should really be doing with that saving every month, is saving it!

Which saving vehicle you choose is entirely up to you, but make sure you’re putting it away somewhere and keeping track of it.

Let’s use a round number and say you’re now saving R500 a month, across all items you’ve chosen to stop insuring. At the end of one year you have saved R6 000, without interest.

If you had lost your cellphone, you could replace it. At the end of two years, you would have R12 000. If you’ve invested it wisely, you could probably be past R13 000 at this point. If you lost your laptop, you could replace it. And so on and so on.

Now Murphy would say that you’d lose your cellphone, your laptop and your watch within the first two months, but I’m saying the chances are slim. On the other hand though, theft is a real concern in our society for most of us, so you’d need to assess your own risk and weigh up the cost-benefit.

The items I have mentioned are usually specific inclusions within household insurance, so you’d need to pay an additional amount to have them covered.

Provided you don’t have a bout of insane bad luck, you’d probably do okay. And after ten years, you might even reach the point where you can just let your investment lie and work for you, without needing to add R500 every month.

The alternative is being a slave to insurance premiums for the rest of your life, which, ten years from now, taking a 6% inflationary increase into account, would amount to a monthly payment of closer to R900.

Author: Gizelle Willows CA(SA), MCom (Finance), is a Lecturer in Financial Reporting at the University of Cape Town.