Discover the importance of financial literacy in understanding insurance, and learn how to make informed decisions to protect your assets and enhance your financial security.
Image: File
Only around 51% of South African adults are considered financially literate. This means that more than half may struggle to fully understand everyday financial products and decisions, which in turn places their financial security and resilience at risk.
And, for many households, insurance remains one of the most misunderstood areas of personal finance.
Many people only look closely at their insurance policies when they need to claim, and, at this point, uncertainties can create unnecessary frustration in an already stressful time. Insurance plays an important role in protecting the things we work hard to have. But a policy can only do this effectively if you know what it covers and how it works.
When we understand our insurance, we’re far better equipped to make decisions that match our risks. We’re more likely to choose cover that suits our circumstances, avoid gaps in protection, and be aware of how the claims process works before we need to use it. Importantly, we’re also less likely to run into problems caused by confusion about our cover.
A surprising number of claim disputes happen because policyholders don’t realise how a particular condition or exclusion works. This is why understanding your cover is such an important part of financial literacy.
The excess that shapes our cover
Excess is one of the most important aspects of insurance. Simply, excess is the portion of a claim that policyholders pay themselves. Often, excess amounts are fixed by the insurer, especially when it comes to buildings, home contents, and portable possessions cover.
But, when it comes to car insurance, policyholders often have the freedom to choose their excess: the higher the excess, the lower the monthly premium; and the lower the excess, the higher the premium. But, the important thing to remember is that you’ll have to be able to pay the excess yourself.
Exclusions are another key aspect. These are the incidents or risks that insurers don’t cover.
Policyholders sometimes assume that their insurance covers absolutely everything. But all insurance products cover some incidents and risks, and exclude others. As an example, comprehensive car insurance covers accidental damage, loss due to theft and hijacking, and your liability towards third parties, but a ‘third party, fire and theft’ policy excludes accidental damage.
Underinsurance is another common challenge. This happens when the insured values of buildings, home contents, or portable possessions are lower than the cost of replacing them. Even in the event of a valid claim, the payout will likely fall short of the amount needed for a repair or replacement.
Premiums themselves are calculated using several factors, including the value of the insured items, the risks associated with them, and policyholders’ unique risk profiles and claims histories. Understanding how these factors influence pricing can help us to make more informed decisions about our cover.
The claims process shouldn’t be a surprise
Financial literacy also plays an important role when it comes to the claims process. Knowing what documents are required, how quickly a claim should be lodged, and what steps the insurer will follow can make the experience far less painful.
Just as importantly, insurance isn’t a ‘set and forget’ exercise.
Life evolves. Moving home, buying expensive electronics, or even a change in who drives an insured car most often can all affect the risks you face and the cover you need.
Simple habits can go a long way towards improving insurance literacy: Reading your policy document, checking with your insurer if something isn’t clear, and reviewing your cover at least once a year can help you stay on top of your protection.
Financial Literacy Month, every April, is a good reminder to pause and take stock of your cover. A chat with your insurer and a quick review of your policy can help make sure that your protection matches your life.
* Van Vuuren is the client experience partner at King Price Insurance.
PERSONAL FINANCE