The basics of Insurance
You will have heard or seen the term ‘insurance’ before – on TV, radio, magazines and even when chatting with your friends. Perhaps you’ve even been contacted by an insurance company or broker, offering you an insurance solution.
But what is insurance? Why do you need it and how do you know which insurance package is the best option for you?
To help explain this term ‘insurance’ and to provide you with a basic understanding, we have prepared answers to some common questions.
We will be focusing on non-life insurance. Non-life insurance may be defined as an insurance agreement which you take out only for the period for which you need it. It typically covers ‘your things’, which are objects and possessions. For example, your car, your house, the contents within your house and even your portable possessions. This is different to life insurance, which typically covers ‘you’ and life changing events.
What is an insurance policy?
An insurance policy is a written contract between the policyholder (the person or company that gets the policy) and the insurer (the insurance company). The policyholder is also referred to as the ‘insured’ in most insurance policies.
You cannot insure somebody else’s assets or property. This is due to the fact that you have to have an insurable interest (or in other terms financial interest) in the items that you insure. An individual or company may get an insurance policy (making them the policyholder) that protects another person or entity (who is the insured.)
Insurance policies are often in place for a specific period of time. This can be referred to as the policy term. At the end of that term, you need to renew the policy or buy a new one.
How does an insurance policy work?
Insurance is a transfer of risk from one party to another. Risk in the non-life industry is the potential to suffer a financial loss from an unexpected event (e.g. accident and/or burglary).
When engaging with a broker or insurance company for an insurance policy, they will assess your needs and risk profile, and ensure that you are presented with the right insurance solutions for your unique risk profile.
A broker is a financial intermediary who will help ensure that you have a full grasp of what your insurance policies include, not to mention be there to assist you with any subsequent queries. A good insurance broker will also be accessible, and on hand after the initial transaction and assist you with any insurance-related advice, including updating your cover should your circumstances change.
Every insurance policy includes policy terms and conditions and a personalised insurance schedule. It is very important that policyholders read and understand this documentation as amongst others, they detail what you will and will not be covered for.
For example, there are different types of vehicle insurance policies. A comprehensive motor vehicle policy would provide cover to your vehicle, a third-party vehicle and/or property in the event of an accident. This is different to a third-party only policy, which would protect you against a third-party claim but would not cover damages to your own vehicle or if it is stolen.
What is an insurance premium?
When you buy an insurance policy, part of your responsibility includes paying a fee called a premium. Most premiums are paid monthly, like health insurance, motor vehicle insurance or homeowner’s insurance. An option to pay the premiums annually may also be available.
The insurance premium is calculated based on your specific risk profile. In the example of vehicle insurance, a variety of factors will be used in the calculation of your risk profile premium, including but not limited to, the type of vehicle, your age, the colour of the vehicle, where it is parked during the day and at night, and who will be the regular driver.
Buildings and home contents insurance will factor in the area in which you live, as well as whether you have security features such as an alarm system and armed response.
What is an excess?
In addition to the premiums, most insurance policies include an excess. This is the amount you must pay first when claiming, before the insurance company pays their share.
For example, if you have a R500 excess on your homeowner’s policy and a storm causes R3,000 in damage, you will pay R500 and your insurance company will pay R2,500. With some policies, you can choose the value of your excess within certain value bands. Usually, a higher excess means a lower insurance premium and vice versa.
One of the reasons that an excess is included is to help keep premiums lower and to discourage fraudulent claims, as someone is less likely to submit a false claim when they need to pay an excess upfront.
How does insurance reduce your financial risk?
Imagine you accidently drive into another vehicle, which results in damages to your vehicle and the other party’s vehicle. If you have the right kind of motor vehicle insurance policy, the insurance company will pay the costs of the damages to your vehicle and meet any legal claims laid against you by the third party.
In the event that a water pipe bursts in your bathroom and damages some or all of your possessions in your bathroom, if you have the correct insurance cover as the owner or tenant of the building, the insurance company will either pay, replace or repair the damaged property.
Insurance policies will only pay for events that are covered in the insurance contract. It is therefore important to read the policy’s terms and conditions carefully, so you fully understand what is covered, before you enter into the insurance agreement.
The cost of not having an insurance policy can be severe. For example, if you were to cause damage to another person’s property and you do not have insurance, they may consider pursuing legal charges against you. This is to recoup the cost of repair to the property that you damaged, which you would have to pay for in your personal capacity.
What is non-life insurance?
In simple terms, non-life insurance is an insurance agreement that is taken out for a limited amount of time only and is flexible according to the individual’s needs. For example, you may decide that you need an insurance policy for the time that you own a motor vehicle, which is generally a 12-month contract with the insurance company. Non-life insurance is also called short-term insurance.
What are common types of non-life insurance?
There are many types of insurance, but some common types are described here.
There are different types of healthcare insurance such as primary healthcare and gap cover. It is very important to note that primary healthcare is not the same as a medical aid. Primary healthcare is preventative in nature and depending on the type of plan that you have, will cover costs associated with GP visits and medications. Gap cover is only available to those who have a medical aid and covers the ‘gap’ or shortfall in cost between what a doctor charges versus what a medical aid covers.
Motor vehicle insurance
Protects you from paying the full cost for vehicle repairs and medical expenses due to a collision. There are many different types of motor vehicle insurance products depending on the level of coverage that you require.
Buildings or tenants’ insurance
Protects your home and personal property against damage or loss. For example, damage caused by fire, lightening and from a storm. If you have a mortgage on your property, most financial institutions require you to have homeowner’s insurance as a condition of being granted a bond.
Home contents insurance
Provides cover for the items inside your home, such as your appliances and personal belongings. It’s important to note that not all items transported outside your home will be covered i.e. portable possessions. These may need to be specified on your insurance schedule and an additional premium payable e.g. expensive sunglasses, jewellery etc.
Depending on the policy, it may provide financial reimbursement if a traveller loses their luggage, a flight is delayed or cancelled, and even hospital bills payable in foreign currencies.
Why do I need non-life insurance?
Accidents happen. Insurance is a way of protecting you against unforeseen events that will result in a financial loss. An insurance policy aims to put you in the same financial position which you were in, prior to the occurrence of the loss or damage to your assets, which you insured. For example, repair the damages to your car, so it’s in the condition it was in before an accident. In the example of health insurance, it’s to cover you against unexpected medical-related costs, such as GP visits.
If you have no insurance and an insurable event occurs e.g. a motor vehicle accident, you may be responsible for all related costs. Having the right insurance for the risks you may face can make a big difference in your life.
So, in addition to ensuring that you are in the same financial position you were in before the loss happened, more importantly non-life insurance gives you peace of mind that your valuable assets are protected should they get lost or damaged.
Instead of you having to lose money because something unfortunate happened, insurance allows you to transfer this risk to the insurance company, provided that the payment of your insurance premium is up to date. The insurance company compensates you for your loss, as long as the cause of the loss is covered according to the terms and conditions of your policy.
How much does non-life insurance cost?
The premium payable for an insurance policy is determined by your specific risk profile. For example, the cost to repair or replace a R2 million motor vehicle will differ markedly to a R200 000 motor vehicle. In addition, the risk of insuring a 25-year-old driving a sports car may differ to that of an older and more experienced driver of the same vehicle.
The premiums payable will also differ depending on the type of non-life insurance product. For example, a motor vehicle is typically a much higher premium than buildings or home contents insurance.
The critical factor is to ensure that you seek advice from an insurance broker who will do a proper risk and needs analysis and make the correct recommendations for your needs, pocket and risk profile.
Where can I buy non-life insurance?
There are several different channels through which non-life insurance can be purchased. Some consumers prefer to purchase directly from an insurer whilst others may prefer to make use of a broker. It is recommended to use an insurance broker, as they will ensure that you are presented with the right insurance solutions for your specific needs and risk profile.