An introduction to short term insurance

Profile: Gisela Budler CFP ® An FPI Member since 2016, Gisela has been within the financial services industry since 2007. She specializes in Risk Management and Insurance Operations. She has recently pursued a career change and works as a Lecturer in Financial Planning and Insurance at Milpark Business School. She is in the process of completing her MBA through Milpark, with a special interest in how technology can assist intermediaries. 

An introduction to short term insurance

Insurance is often referred to as a grudge purchase by many consumers. They do not see the value in paying a monthly premium and this is usually one of the first amounts to be revised, or cancelled, when budgeting.

While this might provide some temporary relief, the longer-term financial implications can be devastating.

Before resorting to complete cancellation of a policy, it is important for consumers to be aware of the types of insurance that there are available. Along with the guidance of their intermediary or insurer, consumers need to be aware of the basics of insurance to make an informed choice.

Insurance is a two-way agreement and is a legally binding contract. It is therefore imperative that all information and important disclosures are made. 

Some examples of disclosures are full claims history, regular drivers of vehicles and their ages, and if an insurer has provided notice on an insurance policy before.

Basic Classes of insurance on a Personal policy

Motor Insurance:

It has been estimated by that up to 70% of the approximately 11 million registered vehicles on our South African roads are uninsured! If you are a driver on the road, with or without a finance agreement, you could end up writing your vehicle off and suffer a financial loss that could be difficult to recover from. 

If you own a vehicle that is financed via a credit agreement with a bank, it is usually a contractual obligation that the vehicle is comprehensively insured. Another risk to take into consideration is that you could be held liable by a third party for damages caused by your actions. If you do not have Third Party Cover insurance, there will be no cover for yourself or the other party. 

Buildings Cover:

If you purchase a building via a home loan, your financial institution will require that the home is comprehensively insured. Informing your insurer of the construction of the roof and walls of your building is very important. These will ensure that the correct rating is used by the insurance company and allow them to make an informed choice as to any other requirements that they have.

Household Contents Cover:

A classic example of how to describe this kind of cover is to imagine that you can tip the house that you live in upside down. Anything that can fall out of place (or is not fixed) will need to be taken into consideration. If you ever doubt the amount that should be covered, you can ask your intermediary/insurer for an inventory list.

All Risks Cover:

Any portable possessions that are removed from your home are insured under an All-risks section. Some examples would be cellphones, smartwatches, laptops and hearing aids. 

Roadside and Home Assistance:

Ask your intermediary/insurer to ensure that this cover is on your policy. In the event of any incident such as a burst geyser or an accident, your insurer has access to contractors who can assist you in your time of need.

Understanding your policy schedule:

Exclusions are detailed items, damages or events that will not be covered in terms of your policy. These will be stipulated in your policy wording, and it is vital that you read your policy carefully.

Exclusions may also sometimes be referred to as “exceptions”.

Underinsurance/Average:

Average (or “subject to average”) is the calculation that insurers apply when dealing with a claim in a situation of under-insurance.

Example: 

Peter has a house, and the house is insured for R200,000 (sum insured); 

The cost to completely rebuild the house if completely destroyed is R300 000 (value at risk); 

There is unfortunately a fire, and the cost of repairs is R60 000 (the loss); 

The amount that will be paid (settlement) is:

 R200 000/R300 000 (Sum Insured/Value at risk) x R60 000 (value of claim) = R40 000 paid.

Conclusion:

It is vital to update your sum insured regularly so that you remain insured for the new replacement value and avoid the risk of being under-insured and having average applied to your claim. The concept of average is applicable to house contents too.

Insurance is essential to protect your assets and you will come across many different policies and providers in your lifetime. It is essential to know what each type of policy covers. Do not base your decision merely on what is cheapest but also look at what it provides and how it fits your needs.

We often hear that consumer cannot afford insurance, but in reality, they cannot afford NOT to have it.  You understandably do not want to waste money on any product that is not tailored towards your needs, but the correct policy can protect you and your family from potential financial ruin.

The next article will focus on some more information that consumers should be aware of during the claims process, and some information on how they can object to repudiations of claims.

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