Thembi Kandanga

Hate it or love it, insurance is a necessary part of your financial life.
The foundation of any good financial plan is risk protection. 

A plan that does not begin with risk protection is like building a house without a fence. Think of insurance as the fence you build around your possessions and yourself to keep safe. 

Many people make the mistake of either getting insurance they don’t need or not getting the right type of insurance for their needs. Before you take out an insurance product make sure you understand your unique risks and how you would like to protect yourself. Understand that you do not need every product that is available on the market. A duplication or overlap in risk cover takes more money out of your pockets that can be used elsewhere. 

Insurance can be divided into two broad categories, short-term and long-term. 

Short-Term Insurance

Short-term insurance protects the stuff you own. It covers your car, house, jewellery, electronics, household contents, etc. This type of cover seeks to put you in the financial position that you were in before the unplanned event occurred, such as theft, flooding, fire or car accident.

Short-term insurance is a financial guardrail against unexpected misfortunes where your insurer will pay for repairs or replacement, or a cash lump sum. The type of payout you receive will depend on the kind of short- term insurance you have. In a nutshell, short-term insurance repairs or replaces your valuable possessions and helps finance unforeseen liabilities that we cannot realistically afford to pay on our own.

Long-Term Insurance

Long-term insurance is “you insurance” because it covers bad things that might happen to you. 

It seeks to compensate you or your loved ones for life changing events such as disability, critical illness, loss of income and loss of life.

Some examples of long-term insurance products are income protection to protect you if you can’t work anymore (retrenchment), disability cover to protect you if you become disabled (partial or full disability), and critical illness/dread disease cover to provide for you if you get seriously ill (cancer, stroke, heart attack). These types of insurance products provide either a monthly income for the rest of your life or a lump sum payout. 

Life cover and credit life cover is taken out to protect the loved ones you leave behind when you die. These policies are usually used to pay off existing debt over houses and cars so that your assets are paid off and remain in your family’s hands and even put children through school. 

Funeral cover pays for the expenses that come with your death or the death of a loved one such as travel and tombstones.

To demonstrate the difference between short-term and long-term insurance and how they complement each other, let’s look at protecting one of your assets: your car. 

You have car insurance that covers your car should you be involved in an accident or cause damage to someone else’s car, which is short-term insurance. 

You also have life and disability cover to protect yourself and your family against any financial burden that could come about should you die or become disabled during a car accident, which is long-term insurance.

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