How does insurance work?

Insurance is a promise of reimbursement in the case of a loss.Early traders ‘insured’ their goods by distributing them on a number of boats when travelling down a river, that way if one boat sunk, they only lost a small amount.
Similarly, in the ‘old days’ if a building was destroyed, the community often worked together to reconstruct it so the cost was shared amongst many people.Today it is common to insure risks by using an insurance company that assess the likelihood of an event and charge an appropriate premium. Many people pay into an insurance pool, and some would have an event that would pay out of the pool.
The cost of the premium is low compared to the benefit. Although it works like a lotto draw, it is an unwanted event that triggers a payout.According to the Investment Savings and Insurance Association, for the year ending 30 June 2007 insurance companies (who are members of the association)paid New Zealanders $784.5 million in life, trauma and income protection claims. That’s like having a lotto draw of $2.15 million every day of the year.Paying premiums is like buying a ticket.
The risk of an event exists whether or not the risk is insured. For instance, a person could still die a premature death whether or not they are insured.

A large number of events can be insured. This could be:

• Crashing the car
• Requiring surgery
• Being made redundant
• Being too sick to work
• House being destroyed
• Being seriously ill
• Dying
• Having a terminal illness

It is worth considering what events should be insured & those that can be managed in a different way. The table below is a useful tool to consider the strategy for an event depending on the imapct & frequency of the event.

Manage
e.g. small car accident
Insure
e.g. premature dealth
Reduce
e.g. doctor visits
Save
e.g. retirement

To discuss which events require which strategy, please don't hesitate to give the office a call.