Essential Personal Finance Chapter 6 Insuring risks © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Contents Introduction Human capital vs financial capital Importance of human capital Risk of premature death Risk of poor health Risk of unemployment Other types of insurance Risk of inadequate retirement income Behavioural issues in the protection gap Conclusions © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Major risks Three major risks Premature death Poor health Unemployment © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Financial planning pyramid Figure 6.1 Financial planning pyramid Source: Adapted from financialguide101.com. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Human and financial capital Figure 6.2 Human and financial capital over lifetime (£) © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Types of insurance purchased Figure 6.3 Types of insurance purchased and annual expenditure by households in the UK, 2013 Source: ABI (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Frequency and impact matrix Figure 6.4 Frequency and impact matrix Source: Chartered Institute of Insurance (CII) (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Distribution of human vs financial capital Figure 6.5 Magnitude of human capital Source: Adapted from Johnson and Horan (2013). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Human capital in UK Figure 6.6 Human capital in the UK, 2004-2015 Source: ONS (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Human capital per head Figure 6.7 Human capital per head, 2004-2015 Source: ONS (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Distribution of human capital Figure 6.8 Distribution of human capital among different age groups Source: ONS (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Major causes of premature death Table 6.1 Risks associated with the highest number of deaths, 2013 Source: IHME (2016). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Major diseases in UK Figure 6.9 Major diseases in the UK Source: Department of Health (2014). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Saving or life insurance Figure 6.10 Saving vs life insurance © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Factors affecting life insurance purchase Figure 6.11 Factors to take into account in life insurance purchase

Effects of illness on income Figure 6.12 Effects of illness on income

Unemployment rate Figure 6.13 Unemployment rate in the UK, 1971-2016 Source: ONS (2016).

Unemployment among the young Figure 6.14 Unemployment rate among 16-24 year olds Source: ONS (2014). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Youth unemployment in Europe Table 6.2 Youth unemployment rate in the EU as of December 2015 Source: www.statista.com (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Qualifications and human capital Figure 6.15 Qualifications and human capital Source: ONS (2014). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Life cycle Life cycle of spending and saving © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Savings gap Figure 6.16 Savings gap Source: True Potential (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Behavioural issues 1) Insurance provides future, intangible benefits 3) Loss aversion 5) Existence of welfare system 2) Lack of insurance literacy 4) Heuristics © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Different levels of insurance Figure 6.17 Different levels of insurance © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Conclusions Human capital is the most valuable asset we possess, yet this is often under-insured The full realisation of human capital is hindered by three potential risks: death, ill-heath and unemployment The existence of behavioural biases prevents us from making a rational decision, leaving us exposed to latent risks © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne