INSURANCE 101… Cynthia

What is Insurance? InvestorWord.com defines it as “A promise of compensation for specific potential future losses in exchange for a periodic payment” In layman’s terms, it is money you are paid by your insurer (insurance company) if you lose something you had insured and paid a premium for.

Insurance is a lifeline.  Most people do not appreciate this because it is a cost and more often than not it has no return. It only pays off if sh*t hits the fan and you had been wise to pay those periodic installments called premiums. Truth is no one knows the future. You may use this argument to mean you really don’t need to protect yourself against the unknown. My advice is DON'T!  This in fact should be the reason you protect yourself against that unknown. Life in itself is a risk. If you can, protect yourself to the best of your ability and insurance is one way of doing this.

So what are the ABC’s of insurance? There is the specific potential future loss meaning you have to identify a likely risk that is yet to come that you want your insurer to compensate you for: if it ever happens. Examples of these are accidents, illnesses, fire, theft, damage to property etc. Secondly, there is the periodic payment to the insurer i.e. a premium. As I said above, it costs to be insured. Basically, the insurer requires you to pay a certain amount to him over an agreed period of time so that you are eligible for that compensation if the need arises.

Let us take the example of medical insurance. No one wants to fall sick, yet it happens to the best of us. Good treatment is expensive and most people cannot afford the cost of good treatment from their normal earnings. This is where taking out a medical insurance cover becomes vital. There are many Insurance companies that offer very good medical covers at very competitive rates. Let’s take a cover that allows a maximum limit of say Kshs 25,000/- for outpatient treatment and a maximum limit of Kshs. 250,000/- for inpatient treatment. Such a cover in the current market will cost you on average Kshs. 700/- per month coming to about Kshs. 8,400/- per year (please note my figures are not exact but thereabout); Now look at the benefit here. You can receive outpatient and inpatient treatment up to the maximum limits and your insurer will cover all your bills. You basically pay only Kshs. 8,400/- for Kshs. 275,000/- worth of treatment. That is what I call a good deal! 

Most people get skeptical about insurance because there is the possibility of the risk you have insured yourself against never happening during your insurance period. Well, this is how the insurance companies make their revenue. So unless it was an investment cover (this is a topic for another day), the money does not return to you if the risk does not occur…but what if it does? This should be the question you ask yourself whenever you are tempted to ignore taking out that insurance cover. Can you imagine having to pay the whole Kshs. 275,000/- from your pocket if God forbid you fall ill? You may be forced to seek cheaper treatment and that my friend is taking a gamble with your life. Alternatively, you will pass on the burden to your family and friends to raise the money to cover your bills. To this I say most people have enough financial problems of their own. If you can help it, spare them additional burdens.

Insurance without a doubt takes a huge financial load off your shoulders. You essentially pay less for a bigger benefit when you need it the most. There are many types of insurance covers; any foreseeable risk you can think of can be covered. The starting point is to figure out which risk is most likely to happen to you and cause a financial impact. So if you are in a financial position to insure yourself, do it. Always remember to ask yourself, what if it happens?