Through the course of my work as a financial coach I have come across a few common mistakes people make when it comes to insuring their assets. These mistakes waste money and could be detrimental to your financial health in the long run. 

Here are three common mistakes people make when it comes to short term insurance.

Over insuring

Over insurance occurs when a person has insurance cover that exceeds the value of the possible risk or has two or more insurance policies that cover the same risk.

In simple terms, this happens when an individual has insurance cover which exceeds the replacement value of the insured asset. For example, a property with a replacement value of N$1.5 million is insured for N$3 million. In this scenario the property may be insured above the replacement value with one policy or with multiple policies from different service providers. 

If the house burns down, the insurance company will only pay out the replacement value of the house (N$1.5 million) or what they realistically see fit. If the property is over insured with two different service providers, only one service provider will pay out N$1.5 million or both service providers will share the cost of the N$1.5 million claim amongst them.

Remember the aim of insurance is to put you back in the same financial position you were in before the unplanned event occurred, not to enrich you, so over-insuring your assets will result in you paying more in premiums on a monthly basis for no added benefit. 

Over insurance is very common with short-term insurance policies such as cars, houses and electronics, however, over-insurance can also occur with long-term insurance policies such as life and disability cover, although it is difficult to place a value on the life of a person. 

Under insuring 

Under insurance is when your insurance cover is less than the replacement value of the asset. In other words, the amount you’ve insured the asset for would not be enough to repair, replace or rebuild the damaged property, or your lost or stolen items. This would then require you to pay a portion of the damage/loss out of your own pocket.

Many insurance policies include an ‘Average’ or ‘Under-Insurance’ clause which means if you insure for less than the replacement value of the property, a claim submitted can be reduced in proportion to the amount of the under insurance.

For example, a house is insured for N$500 000 when its actual replacement value is N$1 million. In this case, only half of the property is insured. In turn, only 50% of the claims value will be paid. So, if there is damage to the value of N$100 000, only N$50 000 will be paid out. The balance is then left for you to pay. It is therefore essential that the value of an asset be accurately recorded when taking up the policy.

Misrepresentation/non-disclosure

An insurance contract is a contract of good faith which means that at all times both parties must act honestly and without the desire to defraud the other party. 

Misrepresentation occurs when the information a client provides to an insurer is incomplete or misleading, either carelessly, deliberately or recklessly. Non-disclosure is where the client leaves out relevant information they are asked when taking out their policy or submitting a claim. 

Any one of these two offences when a policy is taken out or when a claim is being submitted is grounds for the insurance company to void the policy and even pursue legal action against the policyholder. 

*Thembi is a financial planner and coach. She runs her own financial coaching business, FinWellness Solutions. Get in touch at kandangatn@gmail.com