Last week I wrote a blog on how to teach your kids about paying bills. One of the bills that most of us need to pay is for insurance. I therefore spent one bedtime teaching my kids about insurance using ‘Insurance Squirrels’. We’d recently re-read ‘Save Your Acorns’ so had squirrels in our minds.
In this short blog, I’ll go through the conversation with my daughters as I hope it helps you start a conversation with your kids about this important money topic.
The Insurance Squirrels
Once upon a time, there were two squirrels called Rosie and Kevin. For many years they had both been planting some of the acorns they found and had each grown a nice forest of oak trees. They used some of these trees to build beautiful cabins to live in.
Rosie was worried about her cabin. She feared that if a big storm came along, her cabin would get badly damaged and she’d have to cut down all her remaining trees to build another one.
Kevin was not worried about that at all. He didn’t believe a storm would come.
For the next two years Kevin was right, there were no storms. However, after two years there was a big storm. Both Kevin’s and Rosie’s cabins were completely destroyed. They were both upset about losing their homes.
Kevin couldn’t believe it. To replace his cabin he’d need to cut down all of his remaining oak trees. In the end, he decided to only cut down a few of his trees and live in a smaller cabin until more of his oak trees had grown. He didn’t enjoy living in the smaller cabin.
Kevin went to see Rosie as he knew she would be in a similar position. However, when he arrived he noticed that Rosie had rebuilt her cabin to as it was before the storm and still had all her oak trees. “How can this be?!, you had the same amount of trees and your cabin got destroyed just as much as mine did?"
Rosie told Kevin all about the Insurance Squirrels.
As she was worried that one day a storm would come and ruin her cabin, she went to see the Insurance Squirrel. Each year she would give the Insurance Squirrel 10 acorns. In exchange, the Insurance Squirrel promised to rebuild her cabin if a storm came that year. If a storm didn’t come, then the Insurance Squirrel would keep the 10 acorns.
So, when the storm came, she explained, I was so upset about losing my home but I was grateful that I had met the Insurance Squirrels as they came around and re-built my cabin to be the same as it was before the storm.
I still give the Insurance Squirrels some acorns each year in case there is another storm in the future.
Kevin decided to go and see the Insurance Squirrels to make sure he could rebuild his cabin if there was another storm.
Questions I asked my daughters after telling them this story:
Which squirrel would you rather be, Rosie or Kevin?
Answer: Rosie as she went to see the Insurance Squirrels and got her cabin back.
Kevin only had to give the Insurance Squirrels 5 acorns each year, why not 10 acorns like Rosie?
Answer: As he now had a smaller cabin, it wouldn't require as much to rebuild after a future storm so it is ‘cheaper’.
If you had a massive forest and a small cabin, would you need to use the Insurance Squirrels?
Answer: Probably not as you could easily use the trees in the forest to rebuild and still have plenty of trees left, especially if you planted the acorns you were no longer giving to the Insurance Squirrels.
I then went a bit technical (as I’m an actuary) with one more question …
If it costs 50 acorns to rebuild Rosie’s cabin, how often do the Insurance Squirrels expect a storm to come, once every 3 years or once every 7 years?
Answer: Once every 7 years. To explain this I said, imagine if they thought a storm was going to come once every 3 years. Over the 3 years, the Insurance Squirrels would get 30 acorns from Rosie (10 each year) and have to pay 50 acorns to rebuild her cabin. So, they would be worse off and likely run out of acorns. If the Insurance Squirrels expected a storm every 7 years, then over that time they would get 70 acorns (10 each year) from Rosie and only expect to pay 50 acorns if the storm came in that time. So, they would expect to keep 20 acorns over 7 years and they use those acorns to help other squirrels protect their cabins from future storms.
Explaining how this works in the real world
I told my daughters that people use insurance to make sure that if something bad happens they have the money to cover the resultant costs. Just like when the Insurance Squirrels rebuilt Rosie’s cabin.
My kids think of money like seeds and their goal is to grow their own financial forest. They now know that insurance is a way to make sure they don’t have to cut down a large part of their forest when bad events happen.
We then talked about all the different things people use insurance for:
Car insurance (pays out if your car gets damaged or damages others)
Life insurance (pays out if you die)
Medical insurance (pays out if you get ill)
Income protection insurance (pays out if you lose your job)
Home insurance (pays out if your house gets damaged)
Contents insurance (pays out if your contents get damaged or stolen)
Travel insurance (pays out if something goes wrong on your holiday)
The more expensive the things you own are, the more it costs to buy insurance.
I told my daughters that some people don’t have insurance or savings. If something bad happens these people won’t have any money left to sort the problem. This means they might have to use "debt". My daughters know that most debt is not good so could see why insurance is particularly important for people with no savings.
I also told them that as our savings have grown over many years, we don’t need as much insurance as we did 10 years ago. If something bad does happen then we can use our savings to cover the costs. We therefore only need insurance against things that would cost a lot of money if something really bad happens.
Whilst insurance feels like a drain on people’s money, it can be a godsend in times of stress. We should teach our kids that insurance is an important part of looking after their money.
To keep the cost of insurance down, the key is to make sure we don’t buy really expensive things (as you’ll need more insurance) and to make sure you have some savings so you don’t have to insure against small events.
Thanks for reading!
What to read next? I'd recommend you read this blog to teach your kids about Passive Income