Money Lesson 5:
Insure against key risks
Now it’s time to address an equally important aspect of financial security: protecting what you’ve built through insurance. Life is unpredictable, and insurance acts as a safety net, shielding you from financial disaster when unexpected events occur. Let’s break it down.
What is Insurance?
Insurance serves as a financial safety net, offering protection against unforeseen events like fires, theft, illness, or accidents.
When you purchase insurance, you enter into a legal agreement with an insurance provider via a policy that outlines the covered losses. If you experience a covered loss and file a claim, the insurance company compensates you or your chosen beneficiary according to the policy's terms.
Essentially, you pay a small monthly amount (called a 'premium') for insurance cover, which provides a much-needed payout in the event of an unexpected occurrence, alleviating the financial burden.
One of the paradoxes of insurance is that it's something you buy hoping never to use. No one wishes for misfortune, but experiencing a loss without insurance can lead to significant financial hardship. Therefore, insurance is a crucial tool for protecting your financial well-being and offering peace of mind.
What Insurance do you need?
The pivotal question to ask yourself is whether you could withstand the consequences of a significant event, such as your home burning down, without facing financial hardship. If not, it may be wise to purchase insurance coverage to protect against such an event.
The cost of an insurance policy generally reflects the potential financial loss it covers and the likelihood of that loss occurring. While some insurance, like car insurance in the UK, is mandatory, others are optional but often highly recommended to mitigate financial risks.
With countless insurance policies available, all protecting you against different types of risk, it's possible to spend a substantial portion of your income on various insurances. So it is important to strike a balance of having enough insurance cover to protect against key risks that are important to you, without overstretching your budget.
Ultimately, the decision to purchase insurance is deeply personal and hinges on factors like your risk tolerance and financial capacity. It requires careful consideration of potential financial risks you or your loved ones might face, the likelihood of such events, and your capacity to handle them financially. If you're at risk of a significant financial blow that you couldn't withstand—like losing your home and possessions in a fire—an insurance policy can provide crucial protection.
In this article, we’re going to outline some of the key types of insurance that you might want to consider. Some of them, like car insurance you’ve probably heard of before, while others might be completely new.
Key types of insurance you should consider:
Life Insurance
What it protects against:
Financial hardship for your family or dependents if you pass away. It pays a lump sum that can help cover things like mortgage payments, school fees, or everyday living costs.
Who it’s for:
Anyone with dependents—partners, children, or others who rely on your income. Some employers offer basic life cover, so it’s worth checking what you already have.
Types of cover:
- Term Life Insurance: Covers you for a set period (e.g. 20 years). Pays out only if you die during the term.
- Whole Life Insurance: Covers you for life and may include an investment component that builds cash value.
Key terms:
- Beneficiary: The person who receives the lump sum.
- Sum assured: The amount paid out when you die.
Income Protection Insurance
What it protects against:
Loss of income if you're unable to work due to illness, injury, or disability. It pays a regular income while you're unable to work, helping you cover essential expenses like rent, bills, and groceries.
Who it’s for:
Ideal for employed or self-employed individuals who rely on their salary to meet monthly expenses and would struggle financially if they were unable to work.
Key terms:
- Deferred period: How long you must wait after stopping work before payments begin.
- Benefit period: The maximum length of time you’ll receive payouts (e.g. 2 years, or until retirement).
Critical Illness Insurance
What it protects against:
Financial strain caused by serious illnesses such as cancer, stroke, or heart attack. It pays a lump sum if you’re diagnosed with a serious condition, which can help cover medical expenses, home adaptations, or living costs while you recover.
Who it’s for:
Anyone who wants a financial buffer if they're diagnosed with a life-altering illness that prevents them from working or brings high medical costs.
Key terms:
- Specified illnesses: The illnesses listed on the policy. It’s important to check these carefully—anything not listed won’t be covered.
- Survival period: The number of days you must survive after diagnosis to receive a payout (typically 14–30 days).
House Insurance
What it protects against:
Damage or loss to your home and belongings from events like fire, flooding, or theft.
Who it’s for:
Homeowners (buildings insurance is usually required by mortgage lenders) and renters (who may only need contents insurance).
Types of cover:
- Buildings Insurance: Covers the structure and permanent fixtures of your home.
- Contents Insurance: Covers personal belongings inside your home.
Key terms:
- Sum insured: Maximum amount the insurer will pay out for a claim.
- Accidental damage: Optional extra that covers unexpected one-off incidents (e.g. drilling through a pipe).
Car Insurance
What it protects against:
The cost of vehicle damage or liability if you cause injury or damage to others while driving.
Who it’s for:
Mandatory for anyone driving a vehicle on public roads in the UK.
Types of cover:
- Third-party only: Covers damage to other people’s vehicles or property.
- Third-party, fire & theft: Adds cover if your car is stolen or damaged by fire.
- Comprehensive: Also covers damage to your own car, even if you're at fault.
Key terms:
- Excess: The amount you pay out-of-pocket for any claim.
- No-claims bonus: A discount on your premium for each year you don’t make a claim.
Travel Insurance
What it protects against:
Unexpected issues while travelling such as medical emergencies, lost luggage, or trip cancellations.
Who it’s for:
Anyone travelling domestically or abroad—especially important for overseas trips where healthcare isn’t free.
Key terms:
- Pre-existing conditions: Health issues you had before buying the policy—may be excluded.
- Exclusions: Specific events or items that aren’t covered (e.g. certain sports or destinations).
Health Insurance
What it protects against:
While the NHS in the UK offers free healthcare, private health insurance gives you access to quicker treatments and a wider range of services. In countries where healthcare isn’t free, it can help cover large costs like hospital stays, medical bills, and prescriptions.
Who it’s for:
In the UK, it’s for those who want faster or more flexible treatment than the NHS can offer. Abroad, it's often essential due to high healthcare costs.
Key terms:
- Premium: The monthly or annual cost of the policy.
- Policy limit: The maximum amount payable under the policy in a year or per treatment.
Pet Insurance
What it protects against:
Pet insurance helps cover the cost of vet bills if your pet falls ill or is injured. It ensures you can afford the best care for your furry companion without dipping into your savings.
Who it’s for:
Pet owners who want financial support if their pet falls ill or is injured.
Key terms:
- Lifetime cover: Ongoing cover for chronic or recurring conditions throughout your pet’s life (as long as you renew).
- Time-limited cover: Covers each condition for a fixed period (e.g. 12 months only).
Insurance may not be the most exciting part of financial planning, but it’s one of the most important. By insuring against life’s key risks—like illness, accidents, and damage to property—you’re protecting both yourself and your loved ones from financial hardship. The peace of mind that comes with knowing you’re covered is invaluable, allowing you to focus on growing your wealth and achieving your financial goals without the fear of unexpected setbacks.
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