Ever wondered what they mean by ‘Long Term Insurance’ and ‘Short Term Insurance’?
Quite honestly, before I got into insurance, I never really cared, and I bet the same thing applies to you, right?
But like me, I’m quite sure you don’t want to look stupid at a function when someone asks you: “So who does your short term insurance?”
Before we look at the fundamental difference between these two common types of insurance covers, let’s first define the term “insurance”. We don’t want to put the cart before the horse.
What is Insurance?
Insurance is simply the transfer of the risk. You transfer your risk of loss to an insurer and pay a premium to have that risk insured.
It could be:
- the risk of dying, while owing a lot of money on your bond or
- the risk of having your new expensive LED SMART TV blow up after a lightning bolt slams into your house.
Whatever it is, the risk transferred to an insurer forms the basis of insurance.
That’s why each and every month you part with some of your hard earned cash to have that brand spanking new silver BMW insured.
Not nice to owe the bank R350 000 on a silver BMW which has just gone missing, right?
Could you imagine strapping on a pair of old dusty Nike running shoes during a particularly freezing Highveld winter and jogging 50km to work and back every morning while still paying off the luxury German car you no longer have the pleasure of driving?
Forget BMW and their sheer driving pleasure – sounds more like sheer driving hell to me.
I bet it sounds like sheer hell to you too, and so you transfer the risk of vehicle theft or damage to an insurer. They charge you an amount for taking the risk off your hands. If you car gets nicked and is not recovered, the insurer pays out the R350 000 and you square off with your bank before marching into the dealership again.
Okay, the transfer of risk idea is easy enough to understand, but are there any specific differences between types of insurance?
When guys talk about long and short term insurance, what do they mean?
Insurance can be divided into two basic categories: Short and long term insurance.
Within each category are a number of different types of insurance such as:
- car and home insurance or
- life insurance.
The major – but not defining difference – would be that with a long term insurance policy, you are looking to insure a person for the long term.
With short term insurance you are covering possessions for the shorter term. Remember that with any type of insurance cover, you are covering either a specific item or a specific eventuality for a period of time.
So am I suggesting that any item I insure for a long period of time is deemed to be long term insurance?
Does that mean if I insure my home for thirty years it’s covered under a long term insurance contract? After all, 30 years is a long term.
Not quite. The time period you are insured for is not what defines the type of insurance.
Below is the fundamental distinction between long and short term insurance.
When a life is insured it is deemed to be long term insurance. That’s what you need to remember.
When it’s any other item besides a human being that’s being insured, it’s deemed to be short term or general insurance.
So while you might have a house insured under your short term home owners policy for 20 years, because you are not insuring a life, its short term cover.
Let’s take a look at examples of long and short term insurance policies so you get a better understanding:
John Blogg calls in an insurance consultant because he needs to insure his life.
John takes out a life insurance policy which will pay out a specified amount of money to his wife when he passes away. This is long term insurance with John himself being the life being insured and his death being the eventuality.
At the same time John decided to take out a 10 year endowment policy for his kid’s education. This is a fixed term investment. The endowment savings policy is taken out through the same life insurance company and is also deemed to be a long term insurance product because John is the insured life (a natural person) and again because of the nature of the investment there is a long fixed premium paying term involved.
So even though the endowment policy is an investment through a life insurance company, and John is not actually insuring his life, it’s still long term insurance. That’s because it involves John as being the insured person, and should he pass away the accumulated monies in the investment will pay out to the nominated beneficiary on the policy.
Let’s look at John’s current car and home insurance policy.
The items currently insured are a BMW (his vehicle), some couches, a fridge, television sets, crockery and cutlery (household contents). Are we agreed on the fact that we’re not talking about someone’s life here? This type of cover is going to fall under the short term insurance category.
Talking about cars…Has your car ever been stolen and you didn’t have insurance? Did you get that sick feeling in your gut?
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Do you need any assistance with your financial planning or insurance? Drop us a line and we will get back to you.
The InsuranceFundi Team