BY: ANDREW STEWART
Do we give insurance the proper respect it should have in our life or we do we just go on routinely having disdain for its existence? When you experience a life milestone, do you consider increasing your insurance amount to have more coverage? When you get a raise do you consider placing coverage where you don’t?
What is insurance and why do we need it? Insurance is rarely educated to individuals and families about its importance to their personal finances. Yes, the different types of insurance are widely advertised, demonstrated and sold..but why? Insurance is all about playing defence and where used as an investment is also used as an offense. The main concept of insurance; that of spreading risk has been around as long as human existence. Whether it was hunting giant elk in a group to spread the risk of being the one gored to death or shipping cargo in several different caravans to avoid losing the whole shipment to a marauding tribe, people have always been wary of risk.
In the dark and middle ages, most craftsmen were trained through the guild system. Apprentices spent their childhoods working for masters for little or no pay. Once they became masters themselves, they paid dues to the guild and trained their own apprentices.
The wealthier guilds had large coffers that acted as a type of insurance fund. If a master’s practice burned down, the guild would rebuild it using money from its coffers. If a master were robbed, the guild would cover his obligations until money started to flow in again. If a master were suddenly disabled or killed, the guild would support him or his widow and family.
There are three key things to remember about insurance; assets, lifestyle, and risk appetite. Insurance can be broken down into three main categories. Your belongings (property), your liabilities (debt), and your body (health). With insurance, you choose what you want to be protected. Then your insurer calculates the risk that the events to be insured will happen or not, then will determine the price you will need to pay (your premium).
Property – Assets
Most basic insurance coverage is property coverage. You pay a premium to have a certain piece of property covered in case something happens to it and for the insurer to make you financially whole again. Let’s say that you have a house that you own free and clear, you have every right to enjoy the use of that house for as long as you like. You may live there, rent it out, leave it vacant or even sell it if you like. However, if a hurricane comes through and demolishes your house, it is still up to you to cover the repair cost. Most middle-class families cannot repair a $500,000 home without insurance.
Now let’s look at the lifestyle aspect of insurance. Your lifestyle choices can and will have an impact on how much you’ll pay for life insurance. Some of the lifestyle choices that can have a significant impact are:
- Your weight. If you’re considered overweight or obese, you’re at risk of a number of serious health issues that are related to weight such as heart attack and stroke.
- Smoking. If you’re a smoker, you’re at risk of a number of health related problems as well as being exposed to a possibility of premature death.
- Heavy drinking. If you drink alcohol on a regular basis and easily exceed moderate levels, you put yourself at risk of alcohol related health issues, such as liver problems.
The good thing about this category is that we have some measure of control and we can make changes in our lives to improve our health and save us money at the same time.
Nothing is constant in our life. Our health, our family, and our assets are all risk prone. One day you are perfectly healthy and the very next day you get sick. The purpose of insurance is to minimize that risk. When something happens to you or your assets, your insurance pays you back; this is risk mitigation.