We need insurance simply to shield us from financial risk. If there were no financial risk, then there would be no need for insurance.
Financial planning is really the process of identifying the financial risk at a given event (such as death/disability) and then addressing it in the most efficient manner possible. Assuming you had sufficient funds to cover you (or your family) in the case of death or disability then you could elect not to insure.
I have a friend, for instance, who opted not to insure his household contents on the grounds that he would rather take the premium he was paying every month and save it… he was banking on being able to save sufficient funds before there was a claim event. This is known as self-insurance and in theory this is a great way to do it – provided that you are able to save sufficient funds before your house is burgled or your geyser bursts. The cold reality is that most of us are not able to save sufficient money on a monthly basis or can’t carry the financial loss, and so we look to insurance to save the day.
In a series of surveys conducted in 2009 and 2010, it emerged that South Africans are hopelessly under-insured. My take on this is that it is true only when applied to the population as a whole, since the majority of us have no insurance at all. But I suspect that of those who actually do take out insurance, many are in fact over-insured.
Watch out for vested interests
I think that this has something to do with the manner in which people are remunerated for selling insurance. We need to watch out for the vested interests of the various parties to insurance agreements.
Statistically there is about 0.4% chance that you will be disabled. This is insignificant, but it is the “what if” factor that needs to be considered. And while most of us can’t afford to carry the risk ourselves and as a result need some form of disability cover (income replacement is probably the best way to go), we also need to look at all the other factors. For example I met with a young family (there were two children) who expressed keenness to load up on disability cover. When we explored all the factors, however, we found that there was a family trust with about R18-million in it that could be accessed in the event of disability. So why waste money on insurance?
How much do I need?
I have a client who was diagnosed with leukaemia at 55. Around the same time, her husband decided he had had enough and went off to “find himself” someplace else, leaving her with two children and no medical aid or medical insurance.
She could have curled up into a lump and waited to die, but instead she took herself off to a State hospital where, to the horror of her friends, she sat in the queue just like most South Africans. Six years later, she is in full remission and living a very full life. She speaks of the experience with nothing but the most incredible grace and admiration for all the specialists and nursing staff who cared for her. Financially, she can’t afford a medical aid but her previous experience has convinced her that if she needed to, she could always get back into the state system.
This is a thought too ghastly for most of us to contemplate but the cold reality is that for most South Africans, private medical aids and insurances are becoming too expensive. So we have two choices: do nothing and end up in the State system (where there are still some incredible pockets of excellence) or we get pragmatic about it and take what insurance/cover we can afford.
And this is a great response to the problem – we’d all like to be on the Roll’s Royce option of the medical scheme but in reality most of us have to settle for the Citi Golf option. Some cover is better than no cover at all and it is up to us to make sure that we know what is and what is not covered.
(Gregg Sneddon, Health24, March 2011)
(Picture: happy family from Shutterstock)