It might seem like an option when times are hard, but cancelling or reducing your insurance cover is not a good idea: it can be catastrophic if you need to claim and find yourself without any form of cover or underinsured.
What is underinsurance? This is when your property, assets and valuables are insured for less than their actual value at the time of the claim.
Why is it a problem? If you are underinsured, you may receive a reduced payout in the event of a claim. In this situation, insurers commonly apply the ‘average’ clause, which means that the insurer could pay a proportionate settlement: the amount paid will be reduced in proportion to how much you are underinsured.
To explain the ‘average’ clause: you have your home insured for R1-million. However, it would cost R5-million to rebuild it from scratch if it was burned to the ground in a household or runaway fire. So you are only covered for one fifth of the rebuild cost and the insurer would only pay you one fifth of the cost of rebuilding of your home or similar claim. The reason for this is that the insurer has been receiving premiums based on one fifth of the total sum at risk to the insurer.
Protect yourself from being underinsured: Assess the cost of replacing the contents of your home or commercial property (a warehouse, etc) and the cost of rebuilding the property. Your quotation – and the value of your insurance – will depend on your valuation of your own assets. Don’t be tempted to underestimate how much it would cost to replace your personal possessions, and don’t rely on the current market value of your house when estimating how much cover you need to be adequately protected. You should also consider the scenario of partial loss of the home/property/stock, and factor in the costs of clearing the site or removal of damaged items. Also, will you have to pay to rent property elsewhere in the meantime?
Things change: life is never static. Your insurance needs to be reassessed annually to take into account factors such high-end new purchases, expansion/upgrades to your home and property, the exchange rate and inflation fluctuations. Be thoughtful about the cost of rebuilding a building or replacing lost or damaged items. Mobile phones, for example, have become ever more expensive as the technology and capacity of what they can do improves. Putting in a pool or outdoor entertainment area can increase the value of your home. It is vital to inform your broker, either at the time of renewal or when the circumstances change, to any alteration in the value of your property. Some policies may automatically increase the value of the items insured by a set percentage each year or in line with inflation.
What about cutting costs on my vehicle insurance? According to the Automobile Association, between 65-70% of the estimated 12-million vehicles on our roads are uninsured, a scary statistic that is increasing all the time. This means that if you are involved in a road accident, you have a three-in-ten chance of it occurring with someone who is insured and can therefore pay for any damage caused. It might be through no fault of your own, but you could be paying for that accident for years! As with home improvements, remember to factor in items like expensive rims, bike carriers, non-standard sound systems, etc.
Some tips to ensure you get the best from your insurance:
Cheaper is not necessarily better! You want a reliable insurer who will pay you quickly when you submit a reasonable claim.
Always be honest and complete all documentation truthfully as non-disclosure may affect payment of a claim. This especially true when stating on your policy the person who is the regular driver of a vehicle.
The Ombudsman for Short-term Insurance (OSTI) explains: “Consumers fail to consider the greater financial effect of misrepresenting material information to the insurer. Whilst the insured may appear to be saving a few hundred Rand on a cheaper premium, there is in fact no valid cover. The majority of insurance policies exclude cover for any loss or damage in circumstances where it is found that information material to the correct underwriting of the risk was misrepresented or not disclosed. This rejection will also extend to third party liability cover, leaving the insured out of pocket in respect of his or her own damage as well as a liability claim which may be submitted by a third party. Another misconception held by consumers is that insurers will never find out that the details of the regular driver noted on the policy are in fact not correct. An insurer has the right to validate any claim which is submitted under a policy. In addition to taking statements from the regular driver, the insured and the incident driver, this process may also include conducting interviews with parties able to attest to the true identity of the regular driver of the vehicle including the neighbours, work colleagues, employers, relatives, friends etc. The information collated from these interviews may demonstrate that the regular driver details have not been noted correctly. If the evidence establishes, on a balance of probabilities, that the information was misrepresented, the Ombudsman will support the insurer’s decision to reject the claim.”
You need to play your part in protecting your assets. Wear-and-tear and lack of maintenance are not the responsibility of your insurer. A car accident as a result of bald tyres or damage to your roof because of blocked gutters or broken roof tiles will not be covered. Take care of your possessions as if you have no cover in place. Check your vehicle doors are locked – remote jamming is on the rise again. Also, stow shopping and valuables in a locked boot, out of sight – and do it before you stop at your destination – who knows who could be watching?
Make sure you understand. Ask your broker to explain so that you clearly understand all of the elements of your policy and cover. Check whether your excess is fixed or percentage based, for example, and ask whether there are value-added benefits, such as car hire in the event of your vehicle being in an accident or being reimbursed for the cost of frozen food spoiled in a power outage or broken freezer.
What happens if I miss a monthly payment? If you miss a single payment, most insurers will process a double debit the next month. If the double debit returns as unpaid the policy is cancelled. No claims will be paid until the outstanding premium is paid in full and up to date.
Can I do away with insurance altogether? Why would you put yourself and your financial security at risk – especially at a time when you have to tighten your belt? With insurance, the risk is shared with your insurer – don’t lose this safety net that protects you and your property. Rather sit down with your broker to discuss how to reduce your monthly premium while remaining insured. There are more reasons to be insured than to cancel or reduce your cover!
Source: Safire Ins Co Ltd