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

2. 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

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

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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

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

16. Effects of illness on income
Figure 6.12 Effects of illness on income

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

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

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

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

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

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

23. 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

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

25. 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