Many people don’t like discussing insurance, yet with an understanding of why insurance is important, you can make better decisions about other parts of your financial life and avoid costly mistakes
Simply put, insurance is a way to manage risk. As you go about your life, there is always a chance that you will be in a car accident, your house may burn, or you may fall sick.
Understanding risk management
The risk of these calamities occurring in your life is small. But if one were to occur, the effects could be catastrophic. Without insurance, you would have to come up with the money on your own. This is not good financial management.
Although these things happen, they don’t happen to everyone. Insurance companies know this. They have enough data to help them know roughly how many people are likely to experience these events. They also know how much recovering from them will cost. Using this information, they spread the risk among all their customers, or the insured.
This makes insurance affordable as costs are shared. Of course, it may sound unfair to those who don’t suffer losses, as they are financing those who make claims, but it could be you making a claim tomorrow.
Insurance is about spreading risk. You pay to insure your car although you may never have an accident, but your payments will cover somebody else who may have an accident. Many people find this unfair.
Why should I pay my insurance every year, yet never have to claim? Here is the answer: Imagine what would happen if you needed to replace your house and didn’t have insurance? You are better off paying premiums every year as an assurance that should anything go wrong, you would be compensated.
Insurance vs. gambling
Insurance is a bit like gambling. You bet a little money because you think the odds are good that you will get a larger payout in the future. But there is one huge difference between gambling and insurance.
Gamblers seek risk in an attempt to get more money; when you buy insurance, your goal is to reduce risk so you don’t lose money. While gamblers can at times be outright careless, people who take insurance are often clever and cautious.
In fact, gambling casinos and insurance companies make use of the same statistical laws. The law of Large Numbers says that the more you have of something, the more likely the characteristics of that something will tend toward the average. The more people who roll the dice, for instance, the better the casino can predict its earnings.
The more people in an insurance fund, the more accurately the insurance company can predict its losses and profits.
How an insurance policy works
Most of the time, using insurance to spread risk is a good thing, as you pay less in premiums. However, like everything not well executed, insurance can be expensive, especially when you have too much or the wrong kinds. Let’s look at some smart ways to keep your insurance down.
All insurance works pretty much the same way. You decide what you want to insure and place a value on it. You are given a quotation and conditions of insuring whatever you want by an insurance company or its broker. Then, pay a premium (a set amount of money) to the insurance company, usually on some sort of schedule (monthly or yearly, for instance).
In return, the company issues you with a policy. This is a contract that gives you certain coverage, or financial protection. When you suffer an insured loss, you file a claim, and the company pays you a benefit in accordance with the contract you signed.
Protecting against catastrophe, not annoyances
Insurance is meant to protect against catastrophes, not day-to-day annoyances. You use insurance to protect yourself from things that aren’t likely, but which would cause financial hardship if they did happen. For example, death, accident, medical costs, or a fire.
Your goal should be to have just the right amount of insurance. If you have too much, you are wasting money.
For example, you should not over-insure your car as its value dips each year. You should revise the insured value accordingly because if an accident happened, you will be paid its current value, not what you bought it for.
If you are young and have no responsibilities, life insurance may not be the best place to put your money. On the other hand, if you have a family and own a business, life insurance could be an excellent way to hedge against the risk that you will die tomorrow. Or if you drive fast and are likely to cause an accident, comprehensive insurance may be the best in case you get sued.
You can be a smart insurer and save a lot of money if you review your coverage from time to time and also follow these suggestions.
Shop around
To find better rates, do thorough research. Get all the information about insurance laws, compare different companies (their track record and reputation), and get quotes. You are better off with companies with a big portfolio, as risks are spread among many customers. Avoid companies that have no track record. They may not be able to pay you when you lodge a claim.
Buy only what you need
Insurance companies and their agents are happy to sell you more coverage than your situation calls for. So, do some research before you buy and have a good idea what you want before you sit down with an insurance agent. Figure out how much and what kind of insurance you need, and don’t let the agent talk you into more.
Raise your deductible
The deductible (also called excess) is the amount you pay on a loss before the insurance company kicks in money. For instance, if your car suffers Ksh50000 damage and you have a Ksh20000 deductible, you pay the first Ksh20000 and your insurance company pays the rest.
The insurance company will advise you on the deductible amount set for your policy, but the lower your deductible, the higher your monthly premiums. If you have a leeway of setting your deductibles, ask yourself how much you can afford to pay if something goes wrong; more specifically, how much is too much? Set your deductibles just below “too much.”
There is no wisdom in lodging a claim when the cost of compensation is just about the value of your deductible. For example, if the quotation for repair of your car is Ksh30000 and your deductible is Ksh20000, you are better off not lodging a claim, as each claim you make also puts up your premiums and you lose your no-claim bonus when your insurance comes up for renewal.
Insurance companies often give a discount if you have multiple policies with them. Plus this saves you the hassle of having to pay more than one company.
Check the company’s speciality
Some insurance companies specialise in different areas, say life, health or motor, but the majority are general insurers. The beauty about companies that specialise is that they have tailor-made products that suit you better and also offer you specialised service, sometimes at a cheaper rate than general insurers.
Read your policy
As with all legal contracts, you must read your policy so you know what’s covered and what isn’t. Don’t wait to find out this when you have an accident. It could be a painful reality. Pay attention to policy changes that come in the mail.
If you have questions, ask your agent or broker or go to the customer care desk of the insurance company. And make it a habit to review your policies every so often to be sure you understand them and to check whether anything has changed.
Don’t duplicate coverage
Know which policies provide which benefits. If you have an Automobile Association of Kenya membership, for example, you don’t need towing insurance on your car policy. If your company gives you a medical benefit, you don’t need a separate medical insurance.
File fewer claims
If you file claims for every little thing, your insurance company will raise your rates. Insurance is meant to cover unexpected big losses, not every ding your car gets from shopping carts or at traffic jams. Also, don’t forget every time you make a claim you lose your non-claim bonus, which helps reduce your premiums in the long run.
Take care of the things you insure
One of the best forms of insurance is routine maintenance. A well-maintained car is less likely to have an accident due to mechanical failure. If you take care of your home, it will weather the ravages of time. And if you exercise and eat right, you will get cheaper life and health insurance.
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