Insurance.
Insurance is a risk management tool. It is a form of contract whereby you make periodic payments (also known as insurance premiums) to an insurance company, in order to provide you compensation for specific potential future injury, losses or damages.
If you are risk averse and you cannot stomach your losses or loss of the ability to earn income, then insurance is just what you need. When you buy insurance, you are effectively transferring the risks to the insurer.
Compulsory and Optional Insurance.
Some types of insurance are compulsory but the majority of insurance is optional.
Examples of compulsory insurance are buildings insurance for mortgage and third party cover for motorists.
Examples of optional insurance are life insurance, medical and health insurance traveling insurance and content insurance.
Do you need (optional) insurance?
When deciding whether you need optional insurance, consider whether you’ll be able to cope financially if an accident happens to you. If you can’t cope, then you need insurance.
If you are the main source of income for your household then you should consider insuring your life by taking on a life insurance. It pays out a lump sum upon your death which your dependents (usually a partner or children) can use to pay off the house mortgage, debts or as a source of income.
However, if you don’t have any dependents, then you don’t really need a life insurance.
Life insurance can also help you achieve special wishes such as leaving your house to a sibling or friend but you want the mortgage to be paid off before they receive your house.
How much cover do you need?
The higher is your insurance cover, the higher will be your premium. Therefore, it is important to balance your cover (benefit) with your premium (cost) to avoid paying too much for the excess cover you don’t need. Similarly, you also don’t want to pay too little premium only to find out in the end that your cover isn’t enough to cover your losses.
Keep in mind insurance cover should provide a compensation that will allow you or your dependents to carry on living comfortably without having to worry about the financial burden arising from the unfortunate event.
It is important that you review your insurance policy every two years to ensure that you are adequately covered. You should also review your policy when something significant happens such as getting married, having a child, or your partner loses his or her income and therefore making you the main breadwinner.