By Ryan McCaughey
In this month’s article, I’ll go into more detail about the importance of short-term insurance cover, as well as its benefits. Short-term insurance is key to any long-term financial planning relating to risk management and mitigation strategies in your personal and/or business affairs.
Like long-term insurance, as discussed last month, short-term insurance is often viewed as a grudge purchase. However, having the appropriate cover in place can protect you against those unforeseen circumstances of not being able to replace your valuables or honour your liabilities or financial responsibilities.
What is short-term risk cover?
The future is uncertain, and unfortunately, living in South Africa, we are faced with a high risk of theft of our personal possessions. This is why short-term insurance cover in personal financial planning is so important. Short-term insurance pays out on an event occurring. An insurable interest needs to exist for cover to be valid. The true value of having risk cover in place is often only realised when an insurable event takes place, and financial support is required in time of need.
Similar to a long-term insurance policy, the financial protection is achieved through paying a monthly premium. In turn, the insurer will pay an agreed amount should a claim event occur. The monthly premium is based on your risk profile, which the insurer determines during the underwriting process. Criteria taken into account during the underwriting process include age, gender, value of insurable interest, driving record, short-term insurance claims history, geographic area, and security arrangements, to name a few.
Types of short-term cover
Short-term insurance comes in the form of either personal or business cover. The most common types of personal short-term insurance cover are:
1. Motor/Vehicle insurance cover. An affordable way to insure your car against theft, damages or accidents, this cover may take the form of:
- Third-party insurance for the damage caused to another vehicle in an accident that was your fault,
- Vehicle cover for theft or damage by fire, or
- Comprehensive cover, which covers the above as well as damage caused by an accident, hijacking, weather, or vandalism.
2. Homeowner property insurance. This covers the structure of your home or property from damage – for example, from fire, flooding, hail, or loss of structural integrity. The cover is usually equal to how much rebuilding it would cost. It's essential to ensure your cover is reviewed every 3-5 years, given building material costs increase.
3. Household content cover. This covers theft, loss or damage to possessions within your home or premises.
4. All-risk (comprehensive) cover. This is cover for personal belongings that can be stolen or damaged that are in your possession while you are outside your home. You can itemise each possession or take out comprehensive all-risk cover.
5. Personal liability insurance. This covers legal liability for accidental death, bodily injury, illness of another person, or accidental loss/damage to property belonging to another person. This cover is usually an add-on benefit to your policy and comes at a minimal monthly cost.
Benefits of having short-term insurance cover
The benefits of short-term insurance are only experienced when an unfortunate event occurs. The main benefits, as highlighted by numerous short-term insurance providers, are:
1. Reduced financial burden. Short-term insurance policy pays out on an event occurring, enabling you to afford the impact of an accident or incident without the need to go into debt.
2. Emergency assistance. Most short-term insurance policies come with added benefits such as emergency assistance: roadside assistance, electrical, water or locksmith repairs. Your short-term policy will provide you with the relevant contact details, which I suggest loading in your contacts on your phone for quick access when required.
3. No-claim benefits. Some insurers offer benefits such as receiving a portion of your premiums back should you have no claims over a certain period. However, please note this should not be a deciding factor when assessing your options.
What to consider when taking out short-term risk cover
The following key components need to be carefully considered for short-term risk cover to achieve its intended purpose in your overall financial plan.
- Identify your needs and how you would like to cover them.
- Clearly understand what options are available to you and understand the terms used in each policy.
- Identify the type of cover available for what you require.
- Request multiple quotes to help make an informed decision.
- Ensure the monthly premium fits within your budget.
As your personal circumstances change over time, it is essential to review the risk cover you have in place, ensuring it meets your needs. Engaging the services of a Certified Financial Planner (CFP) can play a vital role in providing professional short term risk cover advice, ensuring you are appropriately covered. If you don't have an adviser, visit fpimymoney123.co.za for a list of CFP professionals near you.
Ryan McCaughey is a director at Hewett Wealth in Cape Town and the Financial Planner of the Year for 2021/22.