1. Background

“I’m young, I don”t need no insurance.” This is how I first thought of insurance. I never really saw the need to have an insurance policy. Up until age 21, my only interaction with insurance was automotive insurance. My father, a taxi-operator for over 30 years, always warned me to only take “Red Plate” cars as a means of public transportation. You see, in Jamaica, cars that have on a red plate are licensed as Public Passenger Vehicles (PPV). They also have a different class of insurance that accompanies that designation. My father would always say, “Look if yuh meet inna accident, at least yuh have something to get.” I admit, I did not always follow his recommendation. He would say “Don’t let me catch you taking any ‘white plate’ (private) car.” It was only after finishing university that I came to fully appreciate the ingenuity of my father’s advice.

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1. 1. Why You Need Insurance

Last year I wrote an article about this very topic on my personal development website. I detailed 3 reasons Why Young People in particular should purchase insurance as soon as they are able. I highly recommend visiting that article when you are done here.

Suggested Reading. Why Buy Insurance Young

The focus of this article however will be Insurance as an investment. A secondary goal of this article will be to pass on what I learnt so that you too may consider the wisdom of my father.

1. 2. Types of Insurance

The first thing I learnt was that there were different types of insurance. Each for a particular thing. Being “insured” doesn’t necessarily mean that you will be compensated if “anything” happens to you. I learnt that in some cases, insurance simply meant you didn’t have to pay (again) we will return to this in a moment. But for now, let me talk about some of the types of insurance out there. The major ones are:

Critical Illness Insurance

As the name suggest, this covers critical illnesses such things as, cancer, strokes, heart attacks, paralysis and major burns. In some offerings, a critical illness insurance policy may also include coverage for blindness, deafness, loss of speech and coma. The conditions covered will be determined by the company.

Accident Insurance

For the most part, this is one is self explanatory as well, but there are conditions. It mainly covers any incident, whether it be in the form of work related incidents and accidents wherein the insured person is a fare paying passenger on a public transportation. This was the one my father was warning me about. It also covers other accidents resulting in injury where evidence can be provided that the incident was accidental in nature

General Health Insurance

This one is normally taken care of by employers or by your school if you are a student. This is the case in Jamaica. In fact, in Jamaica, you are insured from the moment you enter high school, (~age 12). The problem is, you lose the coverage when you graduate. This type of insurance covers medical procedures (such as X-Rays, CT Scans, Mammograms, etc,) some surgeries, dental and some medications. I was not able to find a provider in Jamaica that offered individual general health insurance but do not take that to mean it does not exist.

Life Insurance

As an adult, this is the one we are most often sold, and for good reason. Read on. Life insurance pays a lump sum to the beneficiary of the life insured person upon death; if death is the result of a circumstance covered under the insurance policy. At first, I was skeptical about this one, primarily because I didn’t see how it benefited me. I was soon made wiser. You see, I eventually learnt that, that was precisely the point of life insurance, it’s not for you; but rather for your loved ones. It soon became this author’s opinion that every sole bread winner should have a life insurance policy. Tweet this if you agree (men in particular).

You should always check the statues of your policy. I cannot stress this enough.

Renters Insurance

This one was far less common when I first got my insurance policies. Renter’s insurance is for people who do not own their own home. If you rent, you can take out a short or medium term policy that will cover the value of your personal belongings at the place you rent. Should a natural disaster occur for instance, you can get compensation as per the terms of your policy. You also do not require your landlord’s permission to apply for renter’s insurance.

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Now that we understand why you need insurance and the different types, let’s look at how insurance can be an investment. I will use different types of insurance as examples in developing my case.

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1. 3. Insurance Is Cheap When You Are Young – And You can Sell It Back Later in Life (But NOT in Jamaican)

Youth is a remarkable advantage, if we use it wisely. Your age is one of the major factors considered when you apply for a life insurance policy. The younger you are, the less your monthly payment (premiums) will be. Hence, you save on the cost of insurance when you buy it young. This is specific to Accident, Critical Illness, General Health and Life Insurance.

Depreciation

Let’s also consider the depreciation of the dollar. Depreciation means that something loses value over time. In this case, we are saying the value of money itself goes down year after year. That is why sweeties that sold for $J1.00 when you were 5 years old (if you are in your twenties) now sell for J$ 20. The cost of insurance this year will go up next year. So, without getting too complex, if you look at insurance as an investment, you want to buy it as early as is possible. Why? because you know that next year; you will be older, the value of your money will be less, and the price of the same policy will go up. In the United States, you can sell your policy for hard cash if you get up to the termination period and no longer need it. Unfortunately, I did not find that this was also possible in Jamaica.

Insurance and Inflation

This is another way of stating the previous point but more focused on the fact that prices will increase over time. Investopedia defines inflation as “… the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.” Insurance is a service based product, and as sure as the price of rice will go up over time, so will the price of insurance. If we are able to purchase something that will bring future value to us, or give us peace of mind, then we probably should not hesitate too long before making the decision. Imagine if you could buy rice at its current price for the next 50 years, that’s basically what you get to do when you buy insurance at a young age. The caveat being that the value of the money you get as claims will have lost value over the 50 year period. But wait; because there’s a solution to that too. Read on.

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1. 4. You Cannot Buy It When You NEED It

“Insurance is just about the one product you can’t buy when you need it.” ~Devrhoid Davis

The monthly cost, the premium, for a policy is determined based on an applicant’s health in the case of health insurance, on the likelihood of an accident in the case of accident insurance and on the risk of you getting a critical diagnosis in the case of critical illness insurance.

In the same way that someone cannot get renter’s insurance after a hurricane has destroyed his refrigerator or her dresser, you can’t get critical illness insurance after you have been diagnosed. The two primary criteria for approval in the case of life insurance are, your age and your health. In fact, most companies are hesitant to insure persons above certain ages. A large amount of policies have termination ages of between 55 and 75 years old. It is not impossible however for a person diagnosed with early cancer to get insurance, it will however be very expensive. In some cases, an applicant over age 55 can be approved for term insurance. Approval will be granted based on the criteria previously mentioned.

1. 5. Insurance is Protection Against Risks

So much can go wrong in this world we live in. Insurance is, well; insurance. It protects the downside when those unforeseen circumstances make an appearance in our lives. In a way, by having insurance, you are investing in your future and the future of your loved ones. It doesn’t even have to be the worse case scenario. Let us image a situation where I had taken one of those robot taxis as a student and I met in a accident. God forbade this, thankfully. The financial implications of such an accident would’ve extended far beyond myself even though at that time I was not the bread winner of my family. The costs associated with my treatment would’ve greatly impaired my household as my father was the sole income earner and had 6 dependents. By taking his advice (90% of the time) I greatly reduced the risk of the putting a financial constraint on my family.

1. 6. It’s Actually an Investment, no, It REALLY Is

Yes, in most cases, when you purchase a life insurance policy, you are actually investing simultaneously. Many insurance policies these days have an active investment component. I am NOT saying that all insurance policies carry this element. However, there are even companies that will bundle, life insurance, pension and investments in a single product. So yes, depending on the company, and the policy, you actually start investing when you get the approval.

1. 7. Final Thoughts

Automate Your Insurance Payments

When you decide to get a financial advisor, they will tell you to automate as many of your standard expenses and your investments as mine did. I fully endorse this idea and here is why. It is easy for us to set aside money for those things that we have as necessities and priorities. We don’t mess with our rent or electricity bill money. The reason is because we can see the immediate penalty if we fail to meet those obligations. We have to take a similar approach to our investments, insurance included. Let me tell you, if you do not do this, you will let it slip one month. I assure you, our will power as humans is not as strong we would want to think. So, automate it, set up a standing order. Let the company take the money out of your cheque before it gets to your account. In this way, not only do you consistently make the commitment but you do not have to force yourself to be disciplined to make the payments.

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Check for Upgrades As Your Financial Situation Improves

Remember earlier we talked about inflation and insurance, well there are two ways to beat that. The first is a feature of some insurance policies. It is known as inflation linking. What this does is that it will automatically adjusts your policy (claim and premium) for the rate of inflation. The payout to your beneficiary will increase every year in increments matching the inflation rate. Consequently, your premiums will also increase from year to year. However, the benefit is this, if you choose to take out a $1,000,000 policy at today’s date, and activate the inflation linking feature; then it will mean that if the something happens 25 years from now, the amount of money paid to your beneficiary will be able to buy the same amount of things that $1,000,000 can buy today. In other words, the purchasing power of your $1,000,000 is preserved.

Conclusion

In conclusion, insurance has various elements to it and there are various types of insurances. You can purchase insurance as protection against risk, use it an element of it for active investing, against which you can borrow and, in the US, you can make capital gains by reselling your policy. So let’s say I’ve convinced you. There are a few questions you might have. I’ve supplied my answers to the most common ones below.

Which Insurance Should You Buy First

An insurance advisor would best be able to answer this question. However, I can tell you which ones I got first and why. I got my Critical Health Insurance first, followed (very closely) by a Life Insurance policy. The reason I got critical health first was because my mother passed from diabetes, she got two strokes. I have been paranoid about that disease since. I got the life insurance policy shortly thereafter, on the same day, because I wanted to ensure that should anything happen to me, I would not leave a financial burden on my father. Additionally, I wanted to ensure he got a return on investment for his investment in me. I wanted to ensure that I left him with enough money should pass from this life before him. Lastly, I got them both on the same day because the premiums were so cheap, J$ 1200 per month, in one case, and j$ 1600 in the other. The Sum to be paid out in the case of a misfortune was to the tune of several million Jamaican dollars. I got those policies in August of 2014.

How Do I Buy Insurance In Jamaica?

In Jamaica, there are several independent insurance companies that provide insurance products. However, most major commercial banks have an arm dedicated to insurance brokerage. They typically have an agent or advisor located inside each branch. I know this to be true in all cases for NCB Financial Group (JSE : $NCBFG) but cannot speak to this for the other financial institutions. You will need to provide the typical documents:

• National Identification (ID, Passport, Drivers License)

• Tax Payers Registration Number (TRN)

• Proof of address (Letter in your name, no older than 3 months, credit card statement, utility bill) and References (in some cases) but

• You may also be required to do a medical examination based on your age, lifestyle and/or medical history.

Do absolutely need an Agent?

Yes. You will need an Agent to manage the process. Caribbean Value Investor partnered with a few Agents to bring you this article, they hail from various institutions. You can browse them via the slideshow below and contact them by clicking on the images at  this link

If the above link does not work, click here view our Featured Agents and Advisors.

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Investors should always consult their financial advisors before investing.

 

Disclaimer: The opinions expressed in this article are solely those of the author(s) and are in no way intended to reflect management’s views. Further, all information provided on Caribbean Value Investor is strictly for educational purposes. Caribbean Value Investor, its Directors, Employees and Stakeholders accept no liability in respect to losses experienced by readers.

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