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Insurance: What’s in it for me?

SmartInsure

Many South Africans, it would seem, cannot find a satisfactory answer to the question of why they would need insurance. As a matter of fact, a massive 70% of vehicles on our roads have no cover at all.

by: Wade Profe

A recent report by the AA reveals that a massive 70% of vehicles on South African roads are not covered by car insurance. And the shortfall in insurance does not just apply to cars. The amount by which South Africans are covered for life insurance falls short by about R28.8 trillion of what they actually need.

Our experience as financial advisors has revealed that many people misunderstand insurance. A common question that bothers many people either explicitly or subconsciously is: “I’m paying these premiums every month for insurance, and what do I get out of it at the end of the day?”

Let’s make one thing clear: insurance is not an investment. An investment happens when you use money to purchase something that should grow in value over time, so that you can profit from selling it for more than you bought it at a later stage. The monthly premiums you pay toward insurance do not serve this function.

Insurance happens when you own something, and you (or your dependants) cannot bear the risk of losing it on your (their) own. This thing that you own may be a car, a house, a cell phone, or even your life. How many of us, if our car gets stolen, have cash in the bank to just buy another one? And how many families would be able to cope financially if a breadwinner was taken away from them?

Due to the crushing financial weight that losing an important asset may have on you, you approach an insurance company for help. And the insurance company responds: “I will help you carry this burden. For a fee.”

The premium that you pay to an insurance company is the compensation they get for carrying your financial burden for you. This monthly fee is not an investment that you can recoup later. It is a tangible possession you give away in exchange for an intangible reality: peace of mind.

And that is really what insurance is all about. You might be lucky and never lose your precious asset, and therefore never have to claim from the insurance you pay for. But the peace of mind you purchased every time you paid that premium is priceless.

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