One of the most misunderstood financial areas is Insurance. People tend to buy products from insurance companies without understanding what they are and why they need them. Many people do blame the insurance salesman for ending up with the wrong product but the responsibility is on us, the consumer of the product to be aware of what we are buying, understand the fine print and make the decision on whether it fits our requirements.
This year we have been fortunate enough in our financial management course, to have insurance professionals from who can actually educate as opposed to just selling and I have learnt a thing or two about insurance. First and foremost insurance must always be looked at as PROTECTION and not INVESTMENT. A lot of people have made the mistake of thinking that their insurance policy is an investment and often start complaining at some point that they ‘have not made any money”. In fact many people will often compare it to other options like shares or property. That is absolutely not the purpose of insurance. Ask yourself what you would like to Protect. You take out medical insurance because you would like some financial protection in the case of illness or accidents. You take out Life insurance because you would like financial protection for your dependants in case something happens to you. You take out domestic insurance because you would like to be able to replace household items should theft/fire happen in your house.
Having understood that you are only taking out insurance to protect, you can then decide what kind of insurance you need. There is General Insurance that covers things like your car and domestic items. The other main category is Life Insurance. You can decide if you want risk to be covered for your entire life (Whole Life Insurance) i.e. whenever something happens to you in the course of your lifetime, your dependants are paid out. You can also decide that you want to cover this risk for only a specific period (Term Life Insurance) e.g. 5 years or 10 years. When you take a mortgage, the bank will take out a Term Life Insurance on you, for the same period as the mortgage. If anything happens to you during that period the insurance company will pay off your mortgage. It is interesting that the banks will take out insurance on our lives if we borrow money but a lot of us will not attach the same importance to ourselves. Many education policies are also a form of Term Life Insurance.
Again, the key consideration when you take insurance is to figure out what you want to protect. List that down before inviting the sales man in. If something happened to you or your ability to work, what would need to be covered in your life? Your dependants many need financial support to live, go to school etc. Insurance is not an investment so even as you protect what you need to do not forget to build up your investments to a level where they can cater for your needs. Only true investment will protect you against inflation! As you do this in time, the insurance focus will move from you to the assets.
Waceke Nduati- Omanga
The author teaches personal financial management. Find her at www.centonomy.com