Did you know: To buy insurance, you must have insurable risk
A risk is insurable if it's out of your control, financially measurable and random in nature
You are surrounded by risks. Crossing the road is a risk, taking a flight is a risk, even munching on those fries is a health risk. You can’t avoid risks, but it helps to know that there is insurance to protect you from the some of the damages that these risks can cause. Most people buy insurance in three quick steps: give the agent a hasty listen, sign the paper, and store the policy away. Few know what risks that policy insures, fewer know if they have an insurable interest in the policy?
Insurable risk
A risk is insurable if it’s out of your control, financially measurable and random in nature.
It is important that its occurrence is random because if you can predict its occurrence, it ceases to be risk and becomes more of a certainty.
Take life insurance. It covers your dependants financially upon your death. Early death is a risk that is random in nature, but as you grow older its probability increases.
So, buying life cover at 30 is easy, at 50 you would have to pay higher premiums, and at 80, you won’t be insured.
The risk also needs to be financially measurable. When you buy a life insurance policy, you need to choose a sum assured. This is the amount the insurer pays to your beneficiary on your death.
Insurable interest
A risk may be insurable but you also need to have an insurable interest in it. It simply means that you need to have an interest in insuring an event: if the insured event occurs, you stand to lose.
Take the case of home insurance. You buy a home insurance policy to cover your house against natural disasters like earthquakes and floods. You have an insurable interest in insuring the house because you will stand to lose if an earthquake damages it. Consider a case where a tenant buys home insurance.
The tenant can insure the contents of the house—because the contents belong to her and she has insurable interest—but not the building. The building belongs to the house owner. So if she insures the building, the insurer will not pay her the claim.
In order to buy insurance, you need to make sure that the risk is insurable and that you have an insurable interest in it.
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