A happy new month to you dear readers, and cherished clients! In our previous article on insurance and wealth creation, we illustrated how you can use policies as a perfect conduit to create generational wealth.

In this second part of the series, we share with you three core principles that you ought to consider before buying any insurance product on the market.

The decision to commit to paying insurance premiums regularly is a bold move, one that shouldn’t be made on the spur of the moment.

The start may be easy, but failure to honour your premium obligations consistently, may lead to losing your insurance cover fairly quickly, and the eventual loss of even the initial premiums you squeezed out of your hard-earned income.

In 2015, an MIT study involving millions of people deciding on a Medicare plan concluded that only 12 percent were able to make the right insurance decisions.

Therefore, we present to you three core facets for your consideration in making informed insurance purchase decisions. These well researched and evidence-based strategies are premised on our previous recommendations.

Assess your financial capacity

Personal finance experts world overstress the critical role of budgeting before spending any money. The idea behind this philosophy is that if you have a plan before you spend, you are in a better position to differentiate between needs and wants.

According to the renowned businessman Dave Ramsey, “a budget is telling your money where to go and not wondering where it went,”

Even in deciding to sign up for an insurance policy, objectively assessing your financial capacity in terms of income and expenditure is key to making a good premium purchase decision.

This is very momentous because if you start paying premiums, you will be required to consistently and timely meet your end of the bargain, or else your cover will be suspended, and you may lose it eventually.

Related article: Six lessons to learn from COVID-19 pandemic.

When budgeting, remember that besides the premium, other costs such as education, transport, and housing are equally very important. Otherwise, it loses meaning when you fail to pay for your insurance premium and also struggle to satisfy other essential obligations.

According to a study by the Economic Policy Institute, in the United States alone, over 16.2 million people risk losing their cover over non-payment stemming from the unemployment caused by the Covid-19 pandemic.

A majority of insurance companies will always grant a grace period of 90 days beyond which you will lose your cover.

Therefore, a clear audit of your financial standing will help you project your current incomes versus the policy premiums.

Will your income, for example, be sufficient to finance the policy and still meet your current needs in case you disengage from your source of income for the next three months?

Explicitly studying your budget will also inform which policy is important for you, and at what cost.

For instance, auto, medical, or home insurance policy may be a necessity, rather than life insurance for low-income earners.

Do not be coerced to sign up for an expensive policy whose obligations you will end up failing to meet.

Seek expert advice

Making any important decision in life is not an easy task.

A 2016 study on consumer decision making in Health Care Marketplace by research firm Rand, indicates that many people make “good” decisions about insurance only to regret later.

“There is clear evidence that consumers have trouble making choices about health insurance plans. They often fail to select the best options, especially when facing many options,” reads part of the study.

To avoid falling into this category, seek the guidance of an expert who will interpret for you what the policy is and is not.

Ulbinate, A., & Kucinskiene, M. (2015) indicated that insurance purchase decision is strongly leaned to customer’s intellect, which can only be attained through consulting with the experts.

During this current COVID-19 pandemic, many insurance companies and clients are in court over whether the current policies cover pandemics or not.

Reuter’s News Agency reports in Paris, that the court had to intervene in a case involving a hotelier who demanded that AXA, one of the biggest insurance companies in France, pays him for the two months the hotelier was unable to open when authorities ordered a lockdown to stop the spread of COVID-19.

The Court ordered the insurer to pay but AXA is appealing the decision. This is a wakeup call for all policy owners and prospective buyers.

Assess the Claim Settlement History

It can be very heart-breaking that your insurer cannot settle your claim after years of sacrifice.

This article will interest you: How to Manage Your Money in a Post-lockdown Economy.

US billionaire Warren Buffett once said: “It takes 20 years to build a reputation and five minutes to ruin it”.

If you consider how arduous the process of building wealth is, even in generational wealth creation, you’ll negotiate the insurance market more carefully.

According to Money Control, a customer must always “choose a company with healthy claims settlement ratios, not only because you will get your money on time but because you are actually dealing with a company that respects you as an honest individual”.

A company with a ‘Repudiation Ratio’ or rejects of not more than 5 percent of its claims, is good enough to trust your money with, says Money Control.

You can find out the claim settlement history of a company by talking to the Insurance Regulatory Authority in your country, former clients, or beneficiaries of the insurance company of your interest, and what is reported in the press.

The other side of Warren Buffet’s saying is that great company with brands to protect pay a greater percentage of claims and pay them faster because they have efficient processes both before taking you on as a customer and after they have sold you a policy.

Such insurance companies have great customer satisfaction indices and are usually more compliant to regulations than companies that have poor claim settlement ratios, as the study by Money Control states.

We hope these three guiding principles will help you make better insurance decisions.

Remember, insurance can be and is a medium for generating generational wealth, not generational misery.