Last Updated on May 28, 2024 by Namooki
Insurance and Emergency funds are a critical component of your personal finance management, or rather, they should be! Some say having insurance is like writing your own will (which is a smart thing to do anyway), in essence, you are just waiting for unfortunate event(s) to happen to you. When planning your finances, you should prepare for unexpected events that could occur and destroy your plans. These events are unplanned and can throw you off your FI journey or slow you down, at the very least.
How can you protect yourself as you strive towards FI? Insurance is a great way to protect yourself. The goal is to relieve yourself of the burden and strain that comes from loss. By paying a relatively small fee (also known as a premium), you can transfer the risk of financial loss to the insurance company. You can go on in your journey knowing that, in the event something terrible happens, your loss can be recovered, or in the case of death, your loved ones are well taken care of.
Life is a Risk
Risk is one of the things associated with humanity. There is no way you can totally… totally avert risk in life. How do you prepare for the unforeseen? One can only mitigate risk through proper planning, should it arise. What happens when you have a car accident or unexpectedly fall sick? Or you lose your job or can’t work for some time due to an accident? These are the kinds of risks (and much more) that insurance prepares you for.
In Nigeria, less than 1% of the population subscribes to any form of insurance policy, and only 3% of the population has health insurance. You want to be prepared to mitigate risk. Insurance is not a luxury. It is a necessity. On your FI journey, there is a risk of your family losing everything in the event of unexpected death. Life Insurance, for example, will ensure your family is taken care of, and your projects or businesses are set up for continuity.
Choosing The Right Insurance
Selecting the right insurance policy ensures you are adequately protected in various situations, be it health issues, vehicle accidents, home damage, or unforeseen events affecting your business. Consider the following key factors to make an informed decision that aligns with your specific needs.
Assess Your Risks
Begin by identifying the potential risks you face, such as illness, disability, property damage, liability, or loss of income. Consider both personal and financial risks.
Emergency Funds
Build and maintain an emergency fund covering at least three to six months’ living expenses. This fund acts as a financial cushion during unexpected events. You have to be intentional by putting money aside, apart from your savings, to build your emergency fund.
Choosing the right type of insurance policy (health, life, auto, home, liability, etc.) should be based on your primary needs and risks. You must determine what you need to protect—health, automobile, home, life, or business—and what kind of incidents or events you want coverage for. Aside from doing research, it is also best you speak to an insurance broker; they are well-versed in the kind of policy that would be most beneficial to you.
Coverage Details: What does this policy cover? How much will it cost me?
Understand what is covered by the policy, including all events, situations, assets, or health aspects it encompasses. Also, be aware of what is not covered. Exclusions can significantly impact your decision, especially if they involve common scenarios or risks relevant to you.
What will this Policy cost me? Evaluate how much you’ll pay periodically (monthly, quarterly, annually) and ensure it fits your budget.
Policy Limits and Caps: How much loss will my policy cover?
Analyze the maximum coverage limits of the Policy you are considering to ensure they are sufficient to cover potential losses or expenses in worst-case scenarios. Check for any limits on payouts for specific incidents or items, as these can affect the utility of the Policy.
Insurance Company’s Reputation: What are other people saying about this Insurance company?
One of the key reasons insurance has very low penetration in Nigeria, aside from the general lack of awareness, is a deep level of mistrust in insurance companies to deliver on their promise in a timely and hassle-free manner. Consider the insurer’s financial stability, customer service records, claim settlement ratio, and testimonials. Ensure the company is licensed, has a good standing in the industry, and is known for a straightforward claims process. Again, your broker will be the best person to recommend solid companies to you.
Claims Process: How tedious or Hassle-free is it?
Understand the procedure for filing a claim, the typical timeline for claims resolution, and any required documentation or evidence. The ease and transparency of the claims process are critical during stressful times.
Flexibility and Customization
How easily can I revise or adjust my Policy as my needs evolve? Look for policies (and the insurance companies that issue those policies) that allow customization. Policies that enable you to tailor the coverage to your specific needs. Consider whether the Policy can be adjusted or upgraded as your needs change.
Compared with other Insurance Companies
Your broker can get quotes from insurers for similar coverage to compare costs and benefits. They will then walk you through each Policy and uncover nuances within each Policy.
Read the Policy Thoroughly: The devil is in the details
Before finalizing, read the entire Policy, including the fine print, to ensure you understand the terms, conditions, and obligations. Ask as many questions as you need to ask. Do not hold back, and do not think a question is stupid.
Insurance policies that are a must-have.
- Health insurance: Health insurance covers medical expenses, including hospitalization, surgery, and medication costs. Without health insurance, medical expenses can be a significant financial burden, particularly in the case of a major illness or injury.
- Life insurance: Life insurance provides financial protection for loved ones in the event of the policyholder’s death. It can help pay for funeral expenses, outstanding debts, and living expenses for dependents.
- Property insurance: Property insurance covers damage to property due to events such as fire, theft, and natural disasters. Without property insurance, repairing or replacing damaged property can be substantial.
- Auto insurance: Auto insurance covers damage or injury caused by an automobile accident. It can help pay for repair, medical, and legal expenses.
In conclusion, insurance plays a crucial role in protecting personal finances and assets by transferring risk, helping with financial recovery, providing peace of mind, reducing the impact of unexpected events, and serving as a form of preparation for potential losses.