Understanding your insurance policy means understanding your rights  

15 Aug 2018: Johannesburg – Most South Africans understand that insurance is needed for buying items like cars, providing for the education of children, and even making sure that there is money to provide for the family when the main breadwinner passes away.

Despite the importance of insurance, very few people really understand what they are signing. Fewer still ask for the wording of a policy to be explained, says Louis Hay, head of short-term insurance propositions at Standard Insurance Limited.

“All that concerns many buyers is that they can afford the monthly premium,” he says. “But understanding the terms used in an insurance policy is vital. They set out what the policy is, how it is administered and the benefits that you can expect.”

Some of the most common terms to be found on a short-term contract are:

  • An Act of God is an event that occurs as the result of natural forces, such as a storm, and happens without anyone being involved. In a policy, this term is usually attached to events that may happen to the insured property. A paragraph using these words will tell you what the company covers and does not cover.
  • A declaration by a person seeking insurance is a statement in which they say that what they are writing on an insurance application is true. If the information is inaccurate or not disclosed, this could result in a claim being turned down or even having a policy canceled.
  • An excess, also known as the ‘first amount payable’ or deductible, is a payment that has to be made by the customer before work is undertaken in terms of a policy. It applies to insurance cover that can vary from a vehicle to a homeowner’s policy and the amount is agreed with upfront between the insurer and the customer. The size of an excess depends on the sum insured, a person’s claims record or even age. The excess amount may have a significant influence on the premium payable, the lower the excess, the higher the premium and vice versa. Having a high excess can cause problems if a claim is made and there is no cash to pay it, and therefore, it must be noted that an excess is by no means compulsory - the customer can elect to waive the excess but in return, the insurance company will charge a higher premium. Some advice is to choose a simple excess structure that is sufficient to keep monthly premiums down, but not too high to cause the customer financial suffering in the event of a claim.
  • A no-claim bonus - also known as a no claims discount - is different to the cash back benefit and could provide a discounted premium if a customer has a good claims history.
  • A cash-back bonus is paid out after a set period of time, usually, three years of no claims paid out – and is potential cash in the pocket of a client, at a future date.
  • A third-party policy usually applies to cars that are old and have low value. The third-party cover makes sure that if the vehicle is involved in an accident, the damage to other vehicles is covered, while the insured‘s vehicle is not. However, third party, fire, and theft policies also cover the insured person for the value of the car if it is stolen or destroyed by fire. 
  • Because of the rule of average, or the possibility of being underinsured, it is best to always ensure the property is insured for the right amount. If the replacement cost at the loss date is higher than the sum insured, the customer is regarded as own insurer for the difference and must pay a relative share of any loss.
  • The customer is responsible to pay the insurer any "betterment", an increase in value or improvement in the condition of an insured item.
  • An exclusion clause tells you clearly what an insurance company will not pay for. If you don’t know what is excluded, you could find yourself making a claim only to have it rejected. For example, an insurance company may refuse to pay for damage to an insured vehicle because the driver was under the influence of drugs or alcohol when the damage occurred.
  • An ex gratia payment clause means that the company will consider making a goodwill payment even though they have no duty to pay under the terms of a policy. These payments are usually only made when a customer has a good history with an insurance company.
  • An escalation clause enables the insurer to increase the sum insured (and the related premium payable) on a property or life insurance policy each year, in line with inflation. This ensures that premiums are automatically increased, so the worth of the insurance does not go down and the policy keeps its value. A good example is a house that was bought many years ago: inflation increases its value, but if the original sum insured does not change, the homeowner could be left with a massive cash gap, as the property would not be fully covered.  It is important to note that the final sum insured remains the customer’s responsibility.
  • The limit of liability is the maximum amount a company will pay for a single loss. This means that any claim that is higher than the amount mentioned in the policy will not be paid. 
  • Most policies will stipulate that an assessor can be appointed to act for the company. This person assesses the damage to an insured item and whether the quote for repairing or replacing an item is valid.
  • Arbitration takes place when a claim is lodged and the company refuses to pay. The insured can then make a formal complaint and the matter is judged by a neutral person, called an Arbitrator, who makes a ruling on the dispute that both parties have to obey. 
  • Indemnity means the right of the customer to be restored as closely as possible to the financial position before the insured loss happened, as long as the sum insured is sufficient
“The more comfortable people are with the terms used in an insurance policy, the less chance of conflicts between the company and the insured. Taking the time to read and understand the duties of both parties will be worth every minute spent,” says Hay.

Mark completed an Honours Degree in Financial Economics and a Master of Commerce (majoring in Economics) at the University of Stellenbosch and became a CERTIFIED FINANCIAL PLANNER® professional in 2011. Additionally, he completed the Advanced Postgraduate Diploma in Financial Planning through the University of Free State (Estate Planning & Asset Types and Investment Instruments) and is committed to ongoing studies within the financial planning profession. 

Although he regards a strong academic background as essential to rendering a quality financial planning and wealth management service, Mark believes first and foremost that the most valuable commodity in the financial planning profession is trust – built over time. He is passionate about advancing the financial planning profession and is committed to making a difference to his clients’ lives by nurturing their financial security and prosperity.

About the Financial Planning Institute of Southern Africa
The Financial Planning Institute of Southern Africa (FPI), a South African Qualifications Authority (SAQA) recognised professional body for financial planners, which serves the public by ensuring that people who carry the CFP® designation are qualified, experienced and professional. FPI has recently been approved by the South Africa Revenue Services (SARS) as a Recognised Controlling Body (RCB).

The Institute is also recognised internationally and is a founding, and a current affiliate member, of the international Financial Planning Standards Board Ltd (FPSB) based in the USA, along with 25 other affiliate member countries who offer CFP® certification, the highest recognised professional designation worldwide for a financial planning professional. 

In 2012, FPI was highly commended by FPSB and awarded Tier 1 Affiliate Status for receiving 96% in the global assessment. This is the highest achievement any affiliate has ever received. For more, visit www.fpi.co.za or follow @FPISANews.