Investment: Insurance - Grade 12

What is Insurance?

Think of insurance as a safety net. You pay a little money regularly (called a premium) to an insurance company, and in return, they promise to cover you if something bad happens—like your house burns down, your car gets stolen, or you get sick. It’s like having a backup plan so you don’t go broke when life throws a curveball.

Example:
Imagine you have a R20,000 phone. You insure it. If it gets stolen, the insurer will either replace it or compensate you based on the agreed value. Without insurance, you'd have to pay the full amount again yourself!

Compulsory vs. Non-Compulsory Insurance

Some insurances you must have because the law says so, and others are optional.

Compulsory Insurance (Must-Have by Law)

This is insurance the government requires you to have. Think of it as "no choice, just pay up."

Examples:

• UIF (Unemployment Insurance Fund) – If you lose your job, this fund gives you some money while you look for another one.

• RAF (Road Accident Fund) – If you're in a car accident, this fund helps cover medical bills and compensation for victims.

Non-Compulsory Insurance (Your Choice)

You decide whether to get it or not. It’s a "better safe than sorry" situation.

Examples:

• Car insurance – Not required by law, but if your car gets stolen and you don’t have insurance, you’re out of luck.
• Home insurance – If a storm destroys your house, insurance can help rebuild it.

Over-Insurance vs. Under-Insurance

Okay, now imagine you own a car worth R100,000. How much should you insure it for?

Over-Insurance (Too Much Coverage)

If you insure your car for R150,000, you’re over-insured. But here’s the catch—the insurer won’t pay you more than its actual worth. If your car gets stolen, they’ll only pay you R100,000, because that’s the market value.

💡 Lesson: Don’t pay higher premiums for extra coverage you won’t get.

Under-Insurance (Too Little Coverage)

If you insure your car for only R50,000, but it’s worth R100,000, you’re under-insured. Now, if you get into an accident and your car is a total loss, the insurer won’t pay the full amount—you only get a portion.

👉 They use the Average Clause to calculate your payout.

Example:

• Your house is worth R2 million, but you only insured it for R1.5 million.
• A fire causes R100,000 in damage.

• The insurer uses this formula:

(Insured Amount / Market Value) × Loss

(R1.5M / R2M) × R100,000 = R75,000

• So you only get R75,000 instead of R100,000. Ouch!

💡 Lesson: Always insure for the full value to avoid getting less than expected.

Key Insurance Terms (Quick & Easy)

• Premium: The money you pay monthly/yearly for insurance.
• Market Value: How much something is worth right now.
• Book Value: The original price minus depreciation (loss of value over time).
• Reinstatement: Instead of giving cash, the insurer might repair or replace the damaged item.
• Excess: The amount you pay out of pocket before insurance kicks in.

Example: If your car repair costs R10,000 and your excess is R2,000, you pay R2,000, and the insurer covers the rest (R8,000).

Insurance vs. Assurance

These words sound similar but mean different things.

Insurance	Assurance
Covers things that might happen.	Covers things that will happen.
Mostly short-term.	Mostly long-term.
Example: Car, home, fire insurance.	Example: Life insurance, retirement plans.

Easy way to remember? Insurance = If. Assurance = When.Short-Term vs. Long-Term Insurance

Short-Term Insurance	Long-Term Insurance
Covers unpredictable risks.	Covers inevitable events.
Example: Theft, fire, car insurance.	Example: Life insurance, retirement savings.

Example:
Car insurance is short-term because you might have an accident.
Life insurance is long-term because you will pass away one day (sorry, but it’s true!).

The Four Key Insurance Principles

Every insurance policy follows these rules:

1️⃣ Indemnity (No Profit Allowed!)

• Insurance puts you back where you were before the loss—you can’t make a profit from a claim.
• Example: If your laptop was worth R5,000, the insurer won’t pay you R10,000.

2️⃣ Security/Certainty

• Mostly applies to long-term insurance (like life insurance).
• It ensures that when a major life event happens (like death or retirement), your family gets financial support.

3️⃣ Utmost Good Faith (Be Honest!)

• Both you and the insurance company must tell the truth.
• Example: If you hide that you’re a smoker when buying life insurance, they could refuse to pay when you pass away.

4️⃣ Insurable Interest

• You can only insure something if losing it would cause you financial harm.
• Example: You can’t insure your neighbor’s car, because if it gets stolen, it doesn’t affect you financially.

Why is Insurance Important for Businesses?

Businesses use insurance to transfer risk so they don’t suffer massive losses.

✅ Protects against dishonest employees (fidelity insurance).
✅ Covers damage from fires, floods, and theft.
✅ Helps recover from public liability claims (if someone sues you for getting hurt on your property).
✅ Protects against strikes and loss of earnings.

Example:
A factory burns down. Without insurance, the business is ruined. With insurance, they can rebuild and continue operating.

Insurable vs. Non-Insurable Risks

Some risks are covered by insurance companies, while others are too unpredictable to insure.

Insurable Risks	Non-Insurable Risks
Theft, fire, property damage.	War, fashion trends, market crashes.
Risks can be calculated.	Too unpredictable.

Example:
You can insure your shop against theft, but you can’t insure against your business failing because customers stop liking your products.

Compulsory Insurance Types

These are must-haves in South Africa:

📌 UIF (Unemployment Insurance Fund) – Helps workers when they lose their jobs.
📌 RAF (Road Accident Fund) – Helps car accident victims.
📌 COIDA (Compensation for Occupational Injuries and Diseases Act) – Protects workers who get injured at work.

Insurance is basically buying peace of mind. You hope you never need to use it, but when disaster strikes, you’ll be glad you have it.