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Do-it-yourself insurance

By Mary Holm

Monday 24th June 2002

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Around this time of year, many of us are gathering together receipts for our charitable donations, so we can apply for a tax rebate.

The rebate, of up to $500 if you make donations totalling $1500 or more, is scheduled to rise for donations made during the current year.

This time next year, you'll be applying for rebates of up to $630. It's an adjustment to take account of inflation since 1990.

That's good. And it makes more applicable a brilliant idea I came across in a book, "Against the Gods - The Remarkable Story of Risk", by American economist Peter Bernstein.

The idea is to set aside, at the beginning of each year, a generous amount that you would like to donate to charity.

Then, if any nasty financial surprises happen during the year, you take that money out of the charity fund.

Bernstein's examples of surprises include, "a speeding ticket, replacing a lost possession, an unwanted touch from an impecunious relative." I'm sure you can add your own.

At the end of the year, your favourite charities receive what's left over.

"The system makes the losses painless, because the charity does the paying," says Bernstein.

The idea is sort of an extension of self insurance. That's something many companies do and, in a limited way, it can work well for individuals.

I'm not suggesting you don't insure your house, car, health, ability to earn and so on. Far from it.

But you can limit your non-life coverage to fairly big disasters. The smaller mishaps, you cover yourself. How?

- Increase your optional excesses on house, contents, car insurance and the like.

- Change your health insurance to cover specialist and hospital care but not visits to your GP.

- Alter your income protection insurance so that you start getting payments if you can't work for three months rather than one month.

This will cut your premiums considerably.

You can set things up formally if you wish, putting the extra money that used to go into premiums into a self insurance account. Use that money to cover losses that you used to be insured for.

If you have a particularly unlucky year right away, of course, the account won't cover everything. You might have to borrow from other savings. But over the years, most people will find the account grows. Why?

Given that insurance companies have to cover their administration costs and make a profit, the average person gets less out of their insurance, over their lifetime, than they put in.

Non-life insurance could, perhaps, be called a losing proposition for most people.

But you're prepared to put up with that because, if you are particularly unlucky, insurance will certainly be a winner for you.

However, if you opt out of coverage for minor losses, you'll be avoiding paying your share of insurance company administration and profits on that coverage.

On average, then, you will be better off.

Note two things here, though. Firstly, if you're a bad driver, or go to the doctor often, or tend to be careless with your possessions, or otherwise expect to make more claims than average, don't reduce your coverage in that area.

Secondly, you need to be prepared for the bad-luck periods, when you'll wish you hadn't self insured.

But then, of course, if you've done Bernstein's trick and set aside a sum for charity, the bad times won't feel too bad.

And there's an unexpected plus to self insurance: You don't have the hassle of making small insurance claims.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at Sorry, but she cannot respond directly to readers.

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