Three Minute Money Matters #3

Short-term insurance

Short term insurance is a mechanism whereby you insure your personal assets against certain losses. The type of insurance you choose depends on the type of asset you want to ensure.
The four main categories are:

Motor vehicle insurance
There are two main types to choose from:

• Comprehensive cover: covers you for any loss, including loss to another person’s vehicle (third party insurance).
• Limited cover: covers you for only theft and third party insurance.

Different insurers have different options. Keep in mind that lower premiums often indicate that limited cover is applicable.

Property insurance
If you own property and have a bond, the bondholder will require that you have insurance on the property. There is a misconception that you have to take the bondholder’s (Bank’s) insurance. This is not the case. You are free to use your own insurance.

It is important to note that you have to insure your property for the replacement value, not the market value

Contents of home insurance
All the items in your home which are not fixed to the property falls within this category. This includes items like your TV, microwave and fridge. The insured risk here is theft, fire, water damage and unforeseen damage. It is important to note that the number of your total assets need to be determined to prevent underinsurance.

The value for which to insure an asset in this category is the replacement value. E.g.: you have an LG flat screen TV that is 2 years old. The insured value is the value that a similar, new TV will cost today.

Your advisor will be able to assist you with an inventory list in order to determine the correct replacement value of all your items to avoid “betterment” being applied to your claim.

“Betterment” example: you have insured your TV for R10 000. There is a valid claim but the replacement value of a similar TV is, in fact, R20 000. Betterment will now be applied in the settlement. As you underinsured the item by 50%, only 50% of the insured amount will be paid out. You will therefore only get R5000 back.

It is therefore CRUCIALLY important to ensure that you insure your assets for the correct amount.

Jewellery: It is important to note that high-value items must be specified and proof of value provided to the insurer in order to prevent limited cover. Certain limits will apply.

All risk cover: General items that are taken out of the home
You might have a need to insure certain items that you carry on your body on a daily basis or certain recreational assets that you use when not at home: e.g., cell phone, laptop, golf clubs, wedding ring etc.

For this type of asset, there is general cover, item based, at a fixed premium. Each and every item will be specified and insured separately. This type of insurance is generally more expensive due to the higher risk involved.

Frequently asked questions:

What is an excess payment?

Insurers want to ensure that their clients take care of their own assets, therefore they enforce an excess amount payable in the event of loss. In this way, they force clients to carry part of the risk.

E.g.: If you insure your vehicle comprehensively, part of the terms is that the first R5000 of any claim will be for your own pocket.

You can get it cheaper elsewhere?

Again, beware of promises of lower premiums as that could be a strong indication of either high excess conditions or limited cover or both.

Who is responsible for ensuring that all the facts on the application document are correct?

It remains the responsibility of the client to ensure that all application forms are completed correctly and that relevant disclosure are made.

Is it important to read the fine print?

Absolutely.

Look out for:

Some insurers require that you take your vehicle for an assessment within a certain time period after taking out the insurance. If you don’t, you may not be insured.

To conclude:

There is a place for all insurers in SA. However, if you are serious about properly insuring your assets, you should consult with your financial advisor.

Disclaimer:
This is not to be used as financial advice, and always consult with your financial advisor before making any decision regarding pension fund withdrawals or transfers. These tax implications are subject to change.