The problem is that, in most cases, the expenses incurred after an accident, the death of a loved one, or a disability are beyond any savings or wealth that a person may have accumulated and it is for this reason that insurance is such an important component of your financial planning.
Purchasing insurance cover is more economical in the long-term than having to use your savings to pay for the loss or damage of assets, especially when it's a costly expense.
Boitumelo Mothoagae, a financial adviser and head of customer retentions at Liberty explains: “The secret to guaranteeing that you are correctly insured lies in understanding the different purposes that long and short term insurance serve.
"Ideally, insurance pay-outs should ensure that you don’t incur any additional expenses at the time of the incident and that your financial position is relatively unaffected.”
Short term insurance is a financial contract that you take with an insurer to protect your movable assets in the case of damage or loss.
The contract stipulates that the company will pay you a set amount of money, or will replace or repair your movable asset in the event of the damage or loss. The length of the contract may vary from one to 12 months.
An example of short term insurance is car and home insurance.
On the other hand, long term insurance is a financial contract that you conclude with an insurer to protect earning capability. This means that you protect yourself in the event of death, disability and/or retrenchment.
In any of these situations where your ability to earn a salary has been compromised, the insurance company will pay you, or a nominated beneficiary of your choice, a set amount known as “the sum assured”.
The term of this contract may be until you stop working or for as long as you are alive.
An example of long term insurance is disability or critical illness cover.
“In 2013, Liberty paid out insurance claims of R2.71bn in total, with R1.86bn paid out for life cover, R439m for income protection and R414m for life cover, an increase of almost R400m from R 2.33bn paid out in 2012.
Mothoagae said: "These statistics are an indication that, even though consumers are financially strained, they are still investing in insurance cover.
"More and more people are choosing to have peace of mind, knowing that should anything happen to their assets or their earning capacity, they will be adequately compensated.”
There are many small scale instances where not having insurance can be a great inconvenience and may exacerbate your situation further, for example being robbed in a foreign country while travelling without travel insurance. That could lead to you being stuck in that country without money. Or a simple geyser burst at home- without insurance you may have to clean up the mess and pay for the repairs out of your own pocket to replace the geyser and damaged carpets and ceiling.
“These are just minor incidents and hopefully you will never have to find yourself in that situation, but the reality is that life does throw curveballs and you can never be over-prepared.
"You could also find yourself in an even worse position where you are retrenched and without income protection.
"It might get to the point where your assets are repossessed, and as such, this type of insurance should be a non-negotiable,” says Mothoagae.
It is important to ask your financial adviser exactly what coverage you have; what the conditions are of your cover and how much you will be paid out in the event of loss or damage. It is also critical to check that you are fully insured for any shortfall amounts.
“Should your assets depreciate in price, the insurer will only pay out the current market value of your assets and you may find that you have to contribute an additional amount for the shortfall,” explains Mothoagae.
Furthermore, the onus is on you to contact an accredited financial adviser to help you review your financial plan annually or whenever you experiences a life-changing event, such as getting married, having a baby, or buying a house. In this way, you will always be insured with the most suitable cover for your life stage.
Mothoagae said: "Paying insurance every month can seem like a hassle, and if you are lucky enough not to need to claim on your insurance, you may feel that you have spent the money for nothing.
“However, when something does go wrong, having insurance will help you cope with the stress of the situation and enable you to cover the expenses without placing strain on your finances,” said Mothoagae.