Take it steady on the insurance bills

7/25/2010 12:40:01 PM

ROBERT LAING

INSURERS like to advertise their products as a form of savings, leading to a common misconception that you can get back what you put in.

Most people only learn the hard way that insurance is not a form of savings, but a form of gambling.

Demanding your money back from an insurer is like demanding your money back from a casino: you can get even more back than you put in under very specific circumstances — ones that have been expertly calculated to be highly improbable.

The small print in insurance policies is a painful rite of passage for most of us.

For instance, reader Nzwana Ndabeni e-mailed: “My car damages are less than R7000, and my insurer says it will not pay. Even if it was more than that, they wouldn’t have agreed to pay the first R7000. If I had been informed of this R7 000 excess rule, I would not have agreed with this arrangement.”

The standard answer to this is: read your policy document — the excess will be stated, though your insurance salesman might have “forgotten” to mention it.

The higher the premium you are willing to pay, the lower the excess is likely to be. But the more money you spend on insurance, the less you have to save. And the excesses and exclusions in short-term insurance policies make a large savings pool a far surer and hassle-free safety net.

Insurance and gambling differ in one important aspect: you are not legally obliged to gamble, whereas insurance is a contractual requirement of asset finance.

Several readers have complained of “rude” messages from banks giving them deadlines by which time they must prove they have insured their homes and cars, or the bank will add insurance costs to their monthly loan-repayment bill.

Banks, in turn, have become exasperated with borrowers ditching insurance policies they committed to when they signed their mortgages or car loans.

Remember: until you’ve paid off the asset, it belongs to the bank, which demands an insurance policy that names it as the beneficiary should disaster strike.

Controversially in South Africa, if you pay cash for your car, there is no legal obligation to take out insurance. Though there is government-enforced insurance in the form of 72c per litre added to the cost of petrol and diesel, this Road Accident Fund levy covers hospital costs to people injured, not damage to other vehicles.

Minister of transport Sbu Ndebele recently told parliament that his department was investigating compulsory insurance for all vehicles.

According to the South African Insurance Association, only about one-third of this country’s 9.5 million vehicles are insured, placing an unfair burden on the few who do pay. Compelling all road users to have insurance would lower the costs.

Leigh Friend, Johannesburg regional manager of MUA Insurance, said: “Compulsory insurance is also critical for the motor industry, as it will ensure an element of stability, allowing more repairs to be carried out, with the result that more of the vehicles on the road will be in an acceptable and roadworthy condition.”

Even if there is not yet a legal requirement to cover damage you may cause to other cars, most responsible people will accept it as a moral duty.

But car insurance is not a savings account that will cover everyday bumper bashings.

Discovery has made it fashionable with medical insurance to disguise this by placing a portion of monthly premiums into a savings account, but I doubt it pays as well as a money-market account.

The ultimate function of insurance is to protect you from complete financial disaster in the event of a catastrophe —- something that is unlikely to happen, and therefore not expensive to insure against.

An insurance salesman is bound to tell you that you are recklessly underinsured and need to spend at least 35% of your salary on the industry’s products. My view is: pay as little for insurance as you can to meet your legal obligations, freeing as much as possible to put into a general savings pool.

A benefit of avoiding buying things on credit is that, besides saving interest, you don’t have to pay insurance.

I don’t see the point of insuring furniture and appliances. They have to be replaced every few years anyway — with money you won’t have if you wasted it on comprehensive household insurance.