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What's the difference between short and long term insurance?
It’s funny how we end up purchasing stuff we know very little about. Insurance is sometimes one of those grudge purchases, and let’s be honest it can be a pretty boring subject, right? As a result, we seldom take the time to understand much about the insurance purchases we make, which is interesting, if you consider we keep paying those premiums religiously every month. Take a few minutes to read and understand what insurance is, and the major difference between long and short term cover.
Insurance is simply the transfer of risk. You transfer the risk, of loss, to an insurer and pay a premium to have that risk insured.
Let’s look at your car for a second. Do you still owe money on it? In effect, the bank owns the car - you just get to drive it until you have paid the bank back. But there is a massive risk that your car could be involved in an accident or even stolen.
What then? You are left sitting with a damaged vehicle, or no vehicle at all, still owing the bank a whack of money!
Can you imagine strapping on a pair of old and 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?
And that is exactly why we insure our vehicles. We have the risk of loss, we hand that risk over to an insurer, who, for an exchange of money (premiums payable on a monthly basis) will take on our risk.
The transfer of risk is easy enough to understand, but are there any specific differences between types of insurance?
What is the difference between your car and home insurance contract and your life insurance policy?
Insurance can be divided into two basic categories: Short and long term insurance
Within each category there are a number of different types of insurance, such as:
- car and home insurance or
- life insurance
With short term insurance you are covering possessions for the short term. Remember that with any type of insurance cover, you are covering either a specific item or a specific eventuality.
So are we suggesting that any item you insure for a long period of time is deemed to be long term insurance? Does that mean if you 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, it is short term cover.
We hope that has gone some way to clearing up any questions you might have had about the difference between long and short term insurance cover.
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