Hiya, this is a post especially for graduates. I’m writing a series Personal Finance 1.0 on personal finance topics that you should know when starting life on your own. If you’re an older reader: Maybe you know someone who could benefit from this information. So please feel free to share this post.
Right, let’s get going!
Quick disclaimer upfront: I’m not a financial adviser and this is not investment advice. On this blog I share my personal experiences and thoughts. Always do your own research when taking financial decisions and consult a professional fiduciary advisor when in doubt. This post refers to the situation in Germany and you need to check the legal situation in your own country.
And now off to insurance matters.
A “private Haftpflichtversicherung” (“private liability insurance”) protects you in case of third party property or body damages you are liable for. Different from healthcare insurance for example, this type of insurance is not compulsory in Germany. And in other countries it doesn’t seem to be widespread at all.
In a lot of cases I’m quite doubtful about the German proneness to take out insurance for everything. But not in this case. And that’s not even because of the financial problems you could encounter if your personal assets don’t suffice to cover large third-party property or body damage. It’s worse for the victims of such damage as they don’t only end up with the damage itself, but aren’t even adequately compensated.
Since the individual risk of very large damages is low, liability insurance of this type is not very expensive. We’re currently talking annual costs of 50 to 100 Euros. You can check-out Finanztip (no affiliate link) for regular price comparisons and recommendations regarding extent of cover. I would make sure that your insurer covers the situation outlined above as well, i.e. the case someone without liability cover causes you a big damage.
A “Berufsunfähigkeitsversicherung (“BU”) (disability insurance/occupational disablement insurance) is intended to cover you in case you can’t work your job any more, compensating your loss of income. There’s a much higher risk of disability leading to job loss than of large private third-party damages. The statutory disability pension will probably not be sufficient to make up for your salary. That’s why most of the fiduciary financial advisors and consumer protection activists recommend taking out this type of insurance.
If you want to follow their recommendation you should watch out for some things:
- The older you are when signing, the more expensive the “BU”-insurance becomes. This might not feel like such a problem since you didn’t spend any money on this while you were younger. But if you’re not only older but have a pre-existing medical condition, you might not find an insurer at all. As you don’t know whether you will develop a medical condition in the future, taking out this type of insurance right when you start to work seems sensible to me. A permanent disability would have the gravest consequences in the early years of your career as well. If you’ve made it to 50 without a “BU”-insurance, built a financial cushion already, and have less financial liabilities (kids, mortgage), there should be a much smaller income gap that needs closing.
- Make sure your insurance contract doesn’t include a term that’s called “abstrakte Verweisklausel”. If the contract includes this term, the insurance company might deny paying out on the grounds that, given your knowledge, you’re still able to take on a different job from the exact job you held before becoming disabled. I worked a student job in a company carrying out insurance recovery claims. Based on that experience I would always expect insurance companies to check quite diligently before paying out large sums. That’s as it should be in principle since any payouts are covered by the universe of the insured, and the higher the damages the higher the insurance premiums. But if you’re hit by disability your first concern is probably not the universe of the insured but your own life. And the last thing you want to go through in that situation is a long legal dispute with your insurance company. It seems this term is less common today than it used to be, but you still need to check.
- Make sure you take out a “BU” separately and not in combination with a whole life insurance or an annuity. Given the current guaranteed interest rates none of these financially make sense anyway. But independent of that I would always separate insuring risks from building wealth. This should keep things more transparent, cost-effective and give you a better return.
- Dive deep into the topic before you actually sign a contract. For all types of insurance Finanztip is my go-to resource. They’ve put together a lot of material and a check list regarding the “Berufsunfähigkeitsversicherung” as well (no affiliate link). But you can check out the Verbraucherzentralen also (no affiliate link), for example.
I don’t have a set view on “BU”. It does feel a bit like a typically German insurance. One of the problems I see is that anyone with a high risk based on their job type will be faced with very high premiums, such as craftsmen. Those are not necessarily high-paying jobs, though. Will there be any money left for building a nest egg after insuring risk? Given the low future payments expected from the statutory pension system, some income from investments will be important in retirement as well.
So you should decide based on your overall situation and the personal safety net you have available.
One insurance where you might actually be covered already without knowing it is “Auslandsreisekrankenversicherung” (health/accident insurance while traveling). When does this insurance make sense? Obviously when you’re traveling to foreign countries. As an EU-national traveling within the EU this is not primarily about the health cover itself. You should be fine anyway because of the co-operation between the EU countries in this area.
I find this type of insurance a good idea since it covers getting you back to your home country for medical reasons. This can be very costly, and is often not covered by your regular health insurance. Just check back with them, then you know where you are.
If you’re not covered by your health insurance, but use one or more credit cards or a current account with special services, have a look in their terms and conditions. Why? In some packages different types of insurance will be automatically included. There’s often travel cancellation cover if you’ve paid for the trip with your credit card. And some packages will offer “Auslandsreisekrankenversicherung” independent of any concrete card payment. But even if you have to take out this type of insurance separately, it comes very cheap.
And now for the insurances that are completely dependent on your lifestyle. First, there’s car insurance, called “Kfz-Versicherung” in Germany. This type of insurance is obviously only relevant for you if you own a car. Car liability insurance (“Kfz-Haftpflichtversicherung”) is mandatory by German law. This will cover third-party damages.
On top of that, you can choose higher insurance cover. There are two types “Teil-” – or “Vollkasko-Versicherung”. If you want to avoid unnecessary costs, you’ll probably decide to buy a used car if you want to own a car at all. In that case “Vollkasko-Versicherung” will not be worth it. For our 22-year-old-car we’ve not even taken out “Teilkasko-Insurance” when we bought it 10 years ago.
As far as differences and recommendations regarding insurance details are concerned, you’ll find a lot of infomation guess where (no affiliate link). But from a range of other consumer-protection-oriented sites on the internet as well.
A “Risiko-Lebensversicherung” (term life insurance) becomes relevant if you have dependents who you need/want to insure against the loss of income in the event of your death. For most that’s at the point where you start your own family. I would make sure that both partners are insured.
This might not be evident with a traditional set-up where one partner is a stay-at home parent without any income. But don’t make the mistake to only insure the partner earning an income. The stay-at-home parent fulfills an important role in taking care of the children and running the household which should be seen as equal to a monetary benefit. You need to insure for having to “source” childcare and household help on the market, and you’ll have to come up with an appropriate amount for this.
As a graduate I guess you’re still single, and this isn’t relevant for you yet. In any case you already know by now where you can find more detailed information.
A “Hausratversicherung” (household contents insurance) can make sense if you have expensive furniture, accessories and clothes and it’s important to you to get compensated if all is stolen from your apartment, for example. This is probably not yet the case for you either?
If you do want to take out this type of insurance, I would make sure to include a deductible. For most insurance policies there are at least two levels of deductible. You can compare what happens to your premium depending on the deductible. And then make an informed decision based on your personal situation.
To close things up, one last word on “Rechtsschutzversicherung” (legal protection insurance). I’m only addressing this type of insurance as there are independent advisors who recommend to take out “Rechtsschutzversicherung” when – and ideally prior to – taking out “Berufsunfähigkeitsversicherung”. The background to this is that, as outlined above, insurers will scrutinize their obligations very carefully before paying out. And around “Berufsunfähigkeitsversicherung” particularly lawsuits seem to be coming up a lot. Since indemnities are high, legal costs can run into very high numbers as well. If you’re thinking about taking out “Rechtsschutzversicherung” in this context, I would look for an insurance company which is not identical with the “BU” insurer and doesn’t belong to the same holding either.
Generally, my impression is that legal protection insurers are quite proficient in the art of excluding any kind of damage where legal protection would come in useful as soon as the first corresponding cases have gone to court. See for example the exclusion of cases around banks/investment advice in their current terms and conditions.
Again, there is not a one-size-fits-all solution. Make sure you know all the pros and cons before taking a final decision.
If you have further questions just post them in the comments or get in touch with me directly.
Katrin / Financial Independence Rocks.