Broadly speaking there are two primary types of insurance that people generally buy, namely short-term insurance and long-term insurance. Long-term insurance is life insurance, and long-term insurance policies pay out a cash value when the insured individual dies. Short term insurance is insurance for the possessions that an individual owns, and short term insurance is usually taken out for your home, the contents in your home, and your car.
When you purchase short-term insurance you are protecting yourself against the possibility of losing your belongings and having to replace them yourself. Now the insurance company carries that risk, and in exchange for taking on this risk they charge you a monthly fee (the premium). The size of the premium depends mainly on the overall amount for which you wish to be insured.
If your car is stolen or written off in an accident, or your home is burgled and you lose valuable items then your insurance company will reimburse you for these losses because you have short-term insurance. They will either give you cash or replace the items themselves. Short-term insurance companies do require you to pay what is known as excess when you make a claim. The excess is a predetermined amount that you agree to contribute towards the total value of your claim. If your excess on your car is R1,000 and you file a claim for R10,000 then the first R1,000 of that claim is paid by you and the short-term insurer pays the balance of R9,000. There are two types of excess: voluntary excess and compulsory excess. If you are willing to pay voluntary excess then your insurance provider drops the cost of your premiums.
When you purchase short-term insurance you must be fully aware of the conditions of your policy. These conditions must be met otherwise your claim might be denied. A prime example of this in South African short-term insurance is with car insurance where the policy might insist that the car is equipped with a vehicle-tracking device. If your car is hijacked and does not have the device installed your insurance company might not honour the claim. The obligation is yours to see what the policy requires and what the policy may exclude.