Concepts like “short- vs long-term insurance” are not always as straightforward as they seem. Understanding the basics can go a long way to achieving financial wellbeing, and it all starts with financial literacy. The more you know, the better equipped you are to plan and manage your finances.
What is insurance?
First of all, insurance covers risk. Risk is anything that could happen that would expose you to loss – usually, a financial expense of some kind. By understanding the basics of insurance, you’ll be able to choose the right insurance cover to help protect you against risk.
An insurance policy is simply a contract between an insurer and an insured (you, for example), where the insurer commits to pay you an agreed amount of money should you experience the risk that is insured. In return, you pay a premium to the insurer: usually a monthly cash payment.This video is a good start, as we unpack terms like “long-term insurance” in a little more detail:
What is a policyholder?
The person who takes out the insurance contract with the insurer is called the policyholder. The policyholder can either be the insured themselves or another person, for example, a spouse or business partner. The policy benefits will always pay out to the policyholder, unless the policy is ceded (which means transferred) to another person or entity.
Insurance: The long and short of it
In South Africa, we usually divide insurance into two categories: short-term and long-term insurance. The best way to demonstrate the difference between the two is to use your home as an example.
To protect your home, the physical building, against damage from fire, break-ins and natural disasters, you’d get building insurance, which is a short-term insurance.
But, to protect yourself and your family against the financial costs that follow life-changing events, such as serious illness, disability or death, you’d get life insurance, which is a type of long-term insurance. Long-term insurance covers a lot more than these examples, so it’s important to educate yourself on an ongoing basis.
When dealing with concepts like insurance, start by asking the right questions. The more you know, the better equipped you are to provide for your loved ones, even after you pass on.
The best time to invest in your own financial literacy is now, so start today for better financial wellbeing tomorrow.
AVBOB Mutual Assurance Society is a licensed life insurer and authorised FSP.
Concepts like “short- vs long-term insurance” are not always as straightforward as they seem. Understanding the basics can go a long way to achieving financial wellbeing, and it all starts with financial literacy. The more you know, the better equipped you are to plan and manage your finances.
