Insurance literacy, the ignored branch of financial literacy

When discussing financial literacy, talk typically turns to over-indebtedness, reckless spending and poor budgeting skills. At the more advanced level, concern is commonly voiced over people’s lack of investment skills and courage. Discussion usually ignores insurance literacy, which is only rarely considered a financial skill. Wrongfully so: costs can skyrocket and thus seriously rock personal economy if a risk becomes unfortunate reality for the uninsured.

A false sense of security

Finland looks after its citizens: statutory insurance protects us against many risks. Finland’s private employee pension insurance system is among the best pension schemes in the world, effectively providing income for the retirement days with an earnings-related model. Statutory health insurance secures us against the loss of income during periods of disability and covers some of our medical, pharmaceutical and travel expenses. Combine that with the Finnish healthcare system, heavily subsidised by the public sector, and Finns are exhaustively covered for illness. All employers must also have workers’ compensation insurance to protect their employees against accidents at work or during commutes. Moreover, motor vehicle liability insurance is statutory for every vehicle, thus extending automatic protection to every road user. What’s more, the disability pension benefits from the motor vehicle liability and workers’ compensation insurance are very generous.

Through their society, Finns are also insured against unemployment. Unlike the previous examples, this insurance requires some initiative on the individual’s part: to be entitled to earnings-related unemployment protection, one must first join an unemployment fund. However, fund memberships fees are typically affordable, so the insurance is worthwhile. The drawback to this is that everyone must shoulder the costs of earnings-related unemployment insurance contributions as part of their salary, regardless of whether or not they belong to an unemployment fund and are entitled to earnings-related protection. In this sense, insuring oneself through a semi-public system requires financial skills and knowledge – and insurance literacy in particular.

A strong statutory insurance system is a wonderful thing: through it, the population is protected against risks as comprehensively as possible. A statutory system may, however, offer people a somewhat false sense of security and make them feel that statutory insurance offers protection even when it does not.

Finland will not fly you home

Finns strongly – but falsely – believe that our public system also covers us abroad. According to an insurance study commissioned by Finance Finland (available only in Finnish), one third of the respondents wrongfully think that Finland will arrange for their return home in case of serious illness or accident. Another 23% cannot say whether this is true or false.

This false belief is extremely dangerous. When abroad, you are in fact fully responsible for yourself. Because we are so used to having affordable, tax-subsidised healthcare, the cost of healthcare may come as a bitter shock when travelling outside the EU. Travelling abroad without travel insurance is indeed risky and foolhardy, especially outside the EU. For example, if an air ambulance needs to fly you back to Finland from the other side of the world, the resulting costs may easily come to a hundred thousand euros. In the EU, all countries must accept EU citizens into their own public healthcare system at the same cost that their own citizens pay, but it can still differ dramatically from what the Finnish system charges.

Public services should not have to protect anyone abroad – when travelling, the responsibility should always fall with the individual. To truly understand this responsibility, one must understand insurance coverage abroad.

Home sweet home

The above-mentioned insurance study also shows that Finns are fairly unanimous about the importance of voluntary home insurance. According to the study, 92% of the respondents had home insurance, which is a fairly good figure. Tenants had a lower insurance rate (87%) than home owners (95%), and insurance rate also varied according to age, with younger people being less likely to have home insurance. Of those aged 18–29, only 85% had home insurance.

Home insurance increases in importance with age and wealth. As people grow older and gain more possessions and responsibilities, they begin to think that they have more to lose, which makes home insurance an attractive option. However, home insurance is just as important for young people moving into their first home because it protects against serious fire and leak damage.

Home insurance also covers personal effects at a much lower cost than dedicated home electronics insurance policies. When you buy a new mobile phone, laptop or washing machine, you are offered a pricey repair plan in case that particular product should break. The prices of these plans may seem cheap until you compare them with the price and coverage of home insurance. After that, they simply look insufficient and expensive. In addition to insuring home and personal effects, home insurance also includes personal liability insurance and legal expenses cover.

The nastier side of dedicated insurance policies are those offered by foreign insurance companies against a certain cancer or other specific illness. These are sheer robbery and have nothing to do with rational insuring.

Who needs life insurance if the car is insured

It is only natural that it feels uncomfortable, even unreal, to think about your own death. This is probably one reason why life insurance has not gained more popularity. Traditional term life insurance nevertheless plays an extremely important role especially for young families with a home loan. In such families, the death of a spouse puts the widow in a tight spot financially – the bigger the loan and the greater the number of children, the more the widow will struggle. The purpose of life insurance is to provide security in situations like this. Various loan insurance policies also work in a similar way and may include interest rate hedging to protect against rising interest rates.

Unfortunately, no recent Finnish research is available about the so-called security deficit, the income risk caused by the death of a guardian. Security deficit refers to the amount of money a household loses in the deceased’s income after life insurance compensation. The most recent study was conducted by the VATT Institute for Economic Research in 2007 (VATT discussion papers 424, 2007. Available in Finnish with an English abstract), and it showed that Finns have a security deficit of EUR 126,000 in general and a security deficit of EUR 230,000 in households with young parents.

It is therefore ironic that according to the insurance study conducted by FFI, only 36% of the respondents have life insurance, but 67% have car insurance, thus making car insurance the most popular voluntary insurance after home insurance.

From understanding coverage to mastering the fine print

In light of these examples, it is safe to say that the insurance literacy of Finns leaves plenty of room for improvement. The basic level of insurance literacy is to understand what public insurance covers. After that, you can think about your own needs and whether you should complement the public coverage with private insurance. In cases such as travel insurance, a private policy is almost always essential.

The next level of insurance literacy involves understanding the sufficiency and coverage of your private insurance. In all honesty, the insurance sector has not made this very easy. As a result of fierce competition over cheaper packages, insurance terms and conditions have become increasingly complex and detailed, with more and more limiting factors built in. This makes it hard for even the most enlightened consumer to compare insurance policies. In addition to having trouble comparing policies, the ordinary consumer can also struggle to understand if a EUR 30,000 limit for medical expenses following an accident is a lot or a little.

Consumers nevertheless have confidence in their own abilities, which is encouraging in itself. According to a study by Kalmi and Ruuskanen (available only in Finnish in Kansantaloudellinen aikakauskirja 1/2016), two out of three believe that they can compare the properties and costs of different insurance products and understand their terms and conditions.

It is not enough for Finns to be able to stay on top of their income and expenses and to understand the principles of moderate wealth gain. Finns also need to understand risks and be able to prepare for them with insurance. Every one of us.