FINANCE: Insurance is protection for your family

One of the best ways to handle crisis and disaster is to be prepared before they occur, and a key element of being prepared is making sure you have enough insurance. You should think of insurance as protection. If you have valuable belongings, you want to protect them from theft, fires and other misfortunes. You want to defend yourself against lawsuits if a mishap occurs on your property or business. You want to protect your business and employees from the consequences of litigation or a natural disaster. We tell you the best ways to protect yourself.

The Westgate terrorist attack has brought to the fore the importance of insurance. So many people died, many were injured and businesses worth billions of shillings destroyed. Woe unto those who did not have insurance cover – they lost everything. You don’t want disaster or other life’s misfortunes to catch you unprepared. Insure yourself, your family and business to protect yourself against life’s unknowns, and they are many. Insurance is the best protection.

There are generally two ways to buy insurance: either directly from an insurance company or its agent, or from a broker who represents one or multiple insurance companies. Working with a broker is perhaps a wise decision because you get exposed to a number of possible products. Although it may be fine to buy insurance directly from the company, especially if you have simple needs, a broker is desirable if you have a large number of assets. In this case you need someone who is going to give you independent, consultative advice.

If you are working with a broker or an insurance sales agent, it is important to understand where their potential conflict of interest might lie. For example, a broker is usually paid a commission based on what you purchase and with some companies they get an additional bonus if they bring in a huge business. This may compromise them to oversell to you so as to earn a bigger commission.

Sales agents are usually paid a salary rather than a commission, which reduces some of the potential for conflict of interest, but remember they will only sell to you their company’s products. A good broker or sales agent should disclose to you how he is getting paid. In addition, not all insurance companies are created equal so you must get to know the company, which will be insuring you. An insurance company needs to be able to pay claims you make, which means that it must be financially solvent.

You can take insurance for almost anything and it all depends on your needs and how much you are willing to spend. We have said in this column before that health insurance is one policy that should take priority over everything else. After that you will need to take other policies that keep you and your family well protected as you go along the business of building your wealth. We look at some of the policies you should consider.

Insure your belongings

The first item on your insurance list, after health cover, should be property insurance. You need to make sure that you have enough insurance for your home, motor vehicle, electronic goods and valuables such as jewelry and art. A good broker can help you to know who the best insurers are in each category.

A good broker can also help make sure that your home is covered specifically for the types of natural disasters most likely to occur in your geographical area whether they be fires, floods or earthquakes, to the extent coverage is available. It is also recommended that you take cover for man-made disasters such as terrorism and robberies. Your policy should provide for the replacement cost of the items rather than the actual cash value, which is the replacement cost minus any depreciation.

As soon as you buy insurance, you should create a detailed inventory of your belongings. This inventory should contain photos of the items, original purchase receipts and insurance policies and should be placed in a secure place outside the home. You can also take a video of your belongings. If you have a large jewelry collection, for example, you should have a catalogue created that includes a photograph of each piece. You may also want to purchase a fireproof in-home safe to hold jewelry and other small valuable items. But remember if robbers enter your home, they may force you to open the safe.

Excess liability insurance

You want to buy insurance to cover the possibility that other people may have an accident while on your property. This excess personal liability coverage protects you in the event you are sued under certain circumstances. For example, if a child drowns in your pool or is bitten by your dog, or an old lady falls on your staircase, you will likely be sued or have to meet their medical bills. Your need for this insurance increases if you have children who drive your car, and as you become wealthier.

You are working very hard to accumulate wealth so that you can have a wonderful retirement and perhaps leave a legacy beyond that. It could be gone in an instant if there is, for example, a horrible car accident involving your child and you end up being sued for several millions. The absence of proper liability coverage could result in you having to liquidate your assets and, potentially, your business to pay for a judgment in a lawsuit.

Insure household staff

If you have a maid, cook, housekeeper, watchman or gardener working directly for you, you should consider taking an insurance policy for them. The law requires that you provide workmen’s compensation and disability insurance for these workers. In addition, if you are hiring people to work in your home, you have a need for excess liability insurance because if a worker is injured in your property, he can sue you. You do not need to have this insurance if you hire your staff from a service provider, for example, a security guard from a security company, but you do if you are their direct employer.

Life insurance

If you have children or other dependents, or if you are married, you should have life insurance. A good place to begin educating yourself about life insurance is calling an insurance company or broker to give you a run down of the kinds of life policies available. They will also help you figure out just how much life insurance you need, depending on your age, how many children or other dependents you have, your income, savings and so forth.

In order to figure out how much life insurance you require, you need to answer two questions. First, how much money do you need to clear your debts in case you die? Second, how much capital do you need to provide an income for your spouse and children in the event of your death? Once you have an amount in mind, you can discuss this with the insurance agent or broker to help you look at various options.

There are two main types of life insurance, term and permanent. Term insurance provides a death benefit only during a specific period of time, whereas permanent life insurance provides a death benefit no matter when you die, and allows you to build up a cash value in the policy based on your premium payments. It is best for you to discuss your individual situation with a broker or agent.

Get your name on the policy

All your insurance polices need to reflect the way your assets are held. For example, many policyholders might think that they are protected by policies in their spouses’ names, but the fine print may indicate that the policy covers only the spouse whose name is entered in the document, or the person who resides in the insured home. So, if you move out of your home because of separation or divorce, you would no longer be covered by the policy. Your belongings left in the home or belongings you take with you to a new home would not be covered, either. In addition, if your house is put into a trust, such as revocable living trust, you must make sure that the name of the insured on the policy is the title of the trust rather than your personal name.

Insure your business

If you own a business, you need to make sure that the business carries proper insurance. A broker or insurance agent should be able to help you determine your requirements. If you are unsure of what your business is worth, ask an accountant to give you a hand. In general, a small business needs property insurance, workmen’s compensation for workers, and liability insurance.

There are four types of liability insurance that are appropriate for business. First, general liability insurance to protect your business from injury claims, property damage, and other things such as false-advertising claims. This insurance is also known as commercial general liability and it may be the only type of business liability insurance you need, depending on your situation.

Second, business owners providing services such as legal, health, accounting or insurance, should consider professional liability insurance, also known as errors and omissions insurance. This protects your business against negligence and mistakes. Depending on your profession it may be legal requirement to carry such a policy.

Third, small businesses selling or manufacturing products need products liability insurance to protect themselves in the event someone is injured as a result of using one of their products. Finally, if your company has a board of directors, you will most likely require to purchase directors and officers insurance, which protects them in the event they are sued as a result of their actions while serving the company.

In addition to these main types of business insurance, there are several industry-specific insurance policies that you may need. For example, doctors may require to have malpractice insurance and building contractors may need specific insurance for specific projects. An insurance broker or agent should be able to help you to determine the type of business insurance that is right for you.

Published in November 2013 issue