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					                                                                                                                                                                              Putting consumer issues on the agenda     13
                                                                ABsA – finAnCiAL LiterACY feAture




how insurance premiums are calculated
Many of us have had the experience             This article explains how premiums             ■ The first amount (excess) payable in        own assessment of the risk to deter-       value of your vehicle does not mean
of getting insurance quotes from               are calculated and what to expect over           the event of a claim; the higher your       mine the premium for each risk. This       that repairing it after an accident will
different insurers and having to               the lifetime of your policy.                     excess (which you have to pay before        means that they forecast the expect-       be cheaper.
choose one. More often than not,                                                                your insurance kicks in), the lower         ed claims for each policy, and in that
it is astonishing how different the            Factors affecting the price                      the premium should be                       lies the inconsistency between the         Where does this leave me?
premiums are, and we immediately               Insurers use a lot of information to           ■ Your home address                           quotes. These are forecasts only; as       There are many inaccurate rumours
get the idea that some companies are           determine your premium. Your bro-                                                            such, they can not be completely ac-       and misconceptions about the calcu-
just out to make a quick buck!                 ker or direct insurer will ask for a lot       On top of this, some insurers allow the       curate predictions of what will hap-       lation of premiums in the insurance
    Once you have chosen a policy              of personal details before they give           sales force (whether broker or direct)        pen. Because different insurers will       market. Although insurers are capital-
/ product / insurer (mostly based              you a quote.                                   the discretion to change premiums             go about it differently and also have      ist companies aiming to make a profit,
on cost), you pay your premium re-                  Increasing the number or value of         when selling new policies. This is done       different expectations and experi-         the competition in the market is such
ligiously every month, just to be con-         items you insure will increase your pre-       to allow for the difference in risk that      ence, the premiums you get quoted          that one cannot afford to be seen as the
fronted a year down the line with              mium. Other important factors are:             the insurer does not know about, be-          can differ dramatically.                   company who rips people off.
a change in the premium. Things                ■ The type of cover provided by                cause the insurer only has the stand-              On the anniversary of policies, it         As long as risk remains very
like parts cost inflation, the effect             the policy (for example, it will be         ard questions available.                      is general practise to revise the policy   volatile and unpredictable, insurance
of 9/11 on world insurance markets                cheaper to take out theft cover only                                                      to ensure that the premium being paid      premiums will differ from company
and the general deteriorating condi-              than to take out a full comprehen-          How insurers come up with premiums            still adheres to the insurer’s predic-     to company.
tions of roads are mentioned, but if              sive policy)                                Insurers use their own past experi-           tion of the risk over the coming year.          If you are serious about protecting
we believe that the insurer is just out        ■ The cover limits provided (R3 million        ence relating to your specific risk           One might expect the premium to go         your financial situation from the sud-
to make a quick buck, we probably                 of liability cover will be more expen-      profile, their view of the future so-         down after a year without claims, but      den impact of theft or accident, then
won’t believe their reasons.                      sive than R1 million, for example)          cio-economic situation and their              keep in mind that even a drop in the       good insurance cover is a necessity.




   insurance: how to ensure you have
   peace of mind                                                                                                                            Why is it important
  We all know that purchasing insurance is     the vehicle most of the time (they will       apply “Average” at point of claim.
                                                                                                                                            for you to have
                                                                                                                                            insurance?
  not nearly as exciting as buying a new car   be the “regular driver”), make sure that      This means that they will only pay in
  a beautiful sweater or a nice sound sys-     you tell your insurer this. It is better to   accordance to the portion of the value
  tem. Yet, when placed in a situation where   pay the correct premium for the risk          you have insured. So, if your house-
  we need to claim from our insurer due to     (even though it may be more expensive)        hold contents will cost you R100 000
  a loss incurred, we often regret that we     than getting your claim rejected due to       to replace, but you only insure it for
  didn’t pay more attention at the time!       you misrepresenting the information.          R50 000, your insurer will only settle
       As consumers, we need to under-                                                       50% of the claim.
  stand that insurance companies go to         2. Use of the vehicle                                                                        The answer is simple: life is unpredictable and the risk of not
  great lengths (using scientific analysis)    It is important that your insurer knows       5. Misrepresentation
  to insure that they price risks correctly.   what a vehicle is used for and how            Honesty is the best policy. Claiming for
                                                                                                                                            having adequate insurance cover often involves having to deal
  Statistics have shown that young driv-       often. A vehicle being used for work          items you did not have, or lying about         with added financial pressure, besides the personal tragedy
  ers are higher risks than, for example, a    purposes (eg. being in a sales role and       your true circumstances, could lead            that is experienced.
  40 year old who has learnt more driving      constantly on the road) will be at a high-    to your whole claim being rejected for
  skills over the years. That is why vehi-     er risk for accidents and losses than a       fraud and you may end up with a crimi-         Why carry all the financial risk when      also not be easy.
  cle insurance premiums for a young 22        vehicle being used for travelling to and      nal record if your insurer decides to          this can be mitigated by sharing in a          Insurance is not a nice-to-have
  year old will be more expensive than for     from work.                                    prosecute. If you have made an honest          collective financial pool that is avail-   item on a personal budget that should
  a married 40 year old.                                                                     error, always be open and honest about         able to cover unforeseen costs? A small    be struck off in view of the current eco-
                                               3. Risk address                               the situation.                                 premium is all that is needed to ensure    nomic scenario, but rather a guarantee
  What then does this                          Another area that often results in the             An Insurance Crime Bureau (ICB) is        financial peace of mind.                   that your finances will not worsen in
  have to do with you?                         rejection of claims is when your risk ad-     currently being established in an effort                                                  the event of an unforeseen incident.
  It is important that you understand in-      dress is incorrect or you did not advise      to address insurance fraud, especially         Question:
  surance and understand your obliga-          your insurer of changes of your risk fac-     organised fraud. Consumers who wish            Times are tough right now; doesn’t         Question:
  tion to provide the correct information      tors. An alarm can only be a deterrent        to report any alleged insurance fraud          it make sense to cut “unnecessary”         Can I at least find ways to reduce
  to your insurance company so that they       if it is activated and in working order. A    or inappropriate behaviour can contact         expenses such as insurance pre-            my insurance premiums for now?
  can insure your risks correctly.             vehicle locked up in a garage will be a       the Insurance Fraudline on telephone:          miums and start paying them again          Yes, you can ask your financial advis-
       Absa Insurance Company has put          lower risk than a vehicle standing out-       0800 25 26 27 or e-mail: insurance@            when one can afford to?                    er to assist you in identifying ways to
  a few tips together based on the most        side in a driveway.                           fraudline.co.za                                No! Times may be tough, but things         reduce your current insurance pre-
  common problems experienced at                                                                  If you have any doubts regarding          could get much worse if you were to        mium in the short term. Remember
  claim stage:                                 4. Replacement value                          your insurance needs, please contact           lose your assets through theft, fire or    though, that in order to pay a reduced
                                               Household contents need to be in-             Absa Brokers on 0860 111 555.                  a vehicle accident. If one compares a      cost you will probably have to take on
  1. Regular Driver                            sured for replacement value. In other                                                        small premium to the potential losses      a higher excess payment in the event
  Always provide the correct information       words, if you have to furnish your            Insurance Fraudline:                           that could be incurred by not having       of a claim.
  at the time when you take out insur-         house today, how much will it cost            Tel: 0800 25 26 27                             adequate insurance cover, only one              Contact Absa Insurance and Finan-
  ance. If, for example, the vehicle be-       you? If you don’t insure it for the full      e-mail: insurance@fraudline.co.za              conclusion emerges – it pays to in-        cial Advisers on 0860 111 555 for advice
  longs to you, but your child will be using   replacement value, your insurer can                                                          sure. Having the discipline to re-start    on how to best structure your insur-
                                                                                                                                            paying your insurance premium may          ance spend.


                                                                                                                                        Sponsored by Absa in the interest of financial literacy
14 Consumerfair Edition 3, 2009 • Published by the National Consumer Forum
                                                                    ABsA – finAnCiAL LiterACY feAture




Absa’s Debt Advice
  1. manage your money and change your life today                                   ■   A good option to consider is Debt Consolidation.                            until your financial situation improves, then change it back to the
    ■   Understand the difference between good debt (paying off a                   ■   If you have a lot of high interest rate debt, you should consider           original loan term.
        house that will increase in value) and debt to finance consump-                 putting all of it into a lower interest rate loan account such as
        tion (credit to buy consumables).                                               your home loan.                                                       b) Fix your interest rate
    ■   Keep your personal debt under control and your life free from worry.        ■   A home loan account usually offers the lowest interest rates in          ■ You may only fix your interest rate for a certain period of time.

                                                                                        comparison to other loan accounts.                                       ■ By doing this you will save on your repayments if the interest

  2. Draw up a budget                                                               ■   You can also use any extra cash that you’ve already paid into               rate increases.
    ■   A budget will help you to go from living beyond your means to                   your home loan to pay off your higher interest rate debt.                ■ You must also consider the fact that decreasing interest rates

        living within your means.                                                   ■   After you have paid off your store accounts, close them for good            will cost you more.
    ■   A budget helps you to spend less than you earn and you’ll have                  and cut up the cards.                                                    ■ If you want to terminate your fixed rate option, you will be

        extra cash every month                                                      ■   Don’t fall into the bad debt trap again – you don’t want to pay for         charged an early termination fee.
    ■   You can use this extra cash to pay off more than the minimum                    a new TV and pay the TV off for the duration of your home loan!
        payment due on your highest interest rate debt.                             ■   Put a direct debit order onto your account for your monthly debt      c) Thinking of buying?
    ■   If you owe R2 000 and your debt repayments are R500 per                         repayments so that money will be automatically deducted and              ■ Even though house prices and interest rates are lower than they

        month, then adding just a R100 extra every month, will take you                 you won’t be tempted to spend the money.                                   were, you must still check your budget to see how much dispos-
        about 4 months to pay it off completely.                                    ■   Once you’ve settled all of your debt, you can start to save and            able income you have to pay off on a bond.
    ■   Another way is to pay your smallest outstanding balance first,                  invest.                                                                  ■ If you don’t have enough for the house you’re looking for, you

        then work your way toward your highest balance debt.                        ■   We suggest you save three months’ salary in an easy to access,             may want to think about buying a smaller, less expensive home.
    ■   You must pay the minimum payment due on every debt                              high interest rate account that you can use in any emergency.            ■ By doing this, you will also ensure that you will be able to afford

        every month.                                                                                                                                               possible interest rate increases.
    ■   Then try to pay extra cash into your smallest debt until it’s paid off.   6. Keeping on top of credit                                                    ■ If you already own a home it’s a good idea to extend it using the

    ■   Then add the minimum payment of the paid off debt to your                 There are many benefits to having a credit card, but only if you manage          available funds in your current Home Loan rather than buying a
        “extra” cash and use that to pay your second smallest debt.               it responsibly. Here are some helpful tips:                                      bigger home.
    ■   Continue with this until all your debts are paid off.                         ■ Always keep up to date with your monthly credit card repayments.

    ■   Be honest when drawing up a budget – when you hide debt                       ■ This will enable you to build up a good credit record. If you’ve      d) Pay more
        you’re only fooling yourself.                                                   got a good credit record it’s easier to get bigger loans at better       ■ A direct debit order ensures your Home Loan gets paid on time

    ■   It’s a good idea to put 10% of your available cash into a                       rates in the future.                                                       every month.
        savings account.                                                              ■ Only spend what you can afford – according to your budget.               ■ By paying as much extra cash as you can into your Home Loan

    ■   This will help you grow your wealth over the medium to long                   ■ If you pay the full outstanding balance on your credit card every          every month, you’ll save on the amount of interest charged.
        term and also give you access to cash during emergencies and                    month, you won’t pay any interest on the borrowed amount.
        difficult times.                                                              ■ This will also ensure that you have finance available if you have     e) Save and deposit
                                                                                        any kind of emergency.                                                   ■ You have to put down a deposit before you can buy a home.

  3. important debt don’ts                                                            ■ Don’t exceed your credit limit. You will be charged extra interest       ■ It’s a good idea to save as much money as you can for this deposit

    ■   Don’t ignore any debt, don’t panic and don’t delay taking                       for doing this.                                                            as the bigger it is, the lower your monthly instalments will be.
        immediate action – call your bank!                                            ■ Try not to use the budget facility on your credit card. This option      ■ It is also important to remember that financial institutions are

    ■   Debt can mount up quickly and a non-payment can damage your                     has a higher interest rate than a normal credit card transaction           requiring much higher deposits than previously.
        credit worthiness and lead to repossession of your property or                  and will cost more in the long run.
        goods, sooner than you think.                                                 ■ Think very carefully before you increase the limit on your credit     8. some tips on how to avoid getting
                                                                                        card. You must make sure that you will be able to cover the              into too much debt:
  4. important debt do’s                                                                monthly repayments before you request a limit increase.                 ■   Put your credit or store cards in a place where you can’t imme-
    ■   Be honest with yourself, your family and those who you owe                    ■ Limit the number of credit cards you have. By doing this, you will          diately access them. This will give you some time to think if you
        money to.                                                                       pay fewer annual card fees and there will be fewer interest rates           really need the item you want to buy.
    ■   If you are not able to make a payment on your debt, you should                  to keep track of.                                                       ■   Only draw money you can afford to lose if you are going to the
        immediately explain this to your lenders and tell them you need               ■ This will make your monthly budgeting much easier.                          casino. Never take your credit or bank cards with you.
        a little more time before you make a payment.                                 ■ Most importantly, choose the credit card that is right for you.         ■   Luxury items such as the latest cell phones, plasma TVs or
    ■   It’s also a good idea to confide in your bank as they have spe-               ■ If you will not be able to pay off the full card amount, it would           holidays should never be bought on credit. If you can’t afford to
        cially trained people to help you in this situation.                            make sense to choose a credit card with a lower interest rate.              buy it with cash – just don’t buy it.
    ■   Choose which debt you’re going to pay off first – the largest                 ■ Consider using a Debit Card instead of a Credit Card. Transac-          ■   Don’t spend more than you make a month. This is a sure fire
        interest rate debt or the smallest outstanding balance.                         tions are immediately deducted from your account and it is safer            way to deplete your savings and max out your credit cards.
                                                                                        than carrying cash.                                                     ■   Don’t use your credit card to pay for ordinary purchases such as
  5. responsible borrowing vs too much debt                                                                                                                         groceries, clothes and entertainment. Use a debit card for these
    ■   Responsible borrowing is when you have enough money to make               7. homeowner tips                                                                 necessary purchases
        the monthly repayments comfortably.                                       Here are some tips if you own a home or thinking about buying one:            ■   Don’t use credit if you have cash.
    ■   Responsible borrowing is also borrowing capital to invest in a            a) Keep your home by extending the term of your loan                          ■   Don’t use credit to pay off debt.
        home, which is likely to increase in value, or in a vehicle, which           The term is the number of years you’ve agreed to pay your Home             ■   Limit the number of credit cards you own (including store cards).
        may help you generate income.                                                Loan over.                                                                 ■   Look for the credit card that offers you the best interest rate and
    ■   This type of borrowing is called secured lending and usually              You can increase the term of your Home Loan to up to 30 years.                    benefits.
        attracts a lower interest rate.                                              ■ Your monthly repayments will decrease if you increase the term           ■   Carry cash or a Debit Card. Because it’s real, you’re less likely to
    ■   Higher interest rate debt usually comes from borrowing money                   of your loan.                                                                make “impulse buys”.
        for consumer items such as clothing, furniture or appliances                 ■ You will, however, pay more interest in the long run.                    ■   Check your account carefully and regularly. Remember that
        over extended periods.                                                       ■ You should only increase the term of your loan for a short period            credit card fraud is on the increase.




                     Sponsored by Absa in the interest of financial literacy
                                                                                                                  Putting consumer issues on the agenda   1
                                                             ABsA – finAnCiAL LiterACY feAture




9. Before you get into debt
a) Set debt limits
   ■ Decide how much you can afford to be in debt, and then make

     sure your total debt is below this amount.

b) Learn about money
   ■ Understand how credit and money works. This will help you

     make the right spending and debt decisions.

c) Shop carefully for debts
   ■ Look for the lowest interest rate loan and make sure you under-

     stand how much you’ll be paying in interest.

d) Deal with debt properly
   ■ Stay in control of your money by paying your bills at the same

     time every month and checking your debts once a year.

10. What to do if you are in debt
a) Start saving
   ■ Put away a small amount of money every month. If you are

     struggling to pay off your monthly debt bills, you can use these
     savings to help.
b) Check your debts carefully
   ■ Check that all of your monthly statements are correct. Once a

     year check to make sure you’re still getting the best interest
     rates and best loan deals possible.

c) Don’t give in to temptation
   ■ After you’ve paid off all of your debt, you may find that compa-

     nies may offer you credit. Don’t accept it. Only take out a loan or
     credit service if you really need it.

11. get full value from your banking
Start saving on costs every month with these helpful tips:
  ■ Use your bank’s ATMs, as you’ll pay more for withdrawing money

     if you use another bank’s ATM.
  ■ It’s cheaper to draw one large amount of cash then many

     smaller ones.
  ■ Using your credit or debit card is cheaper than writing a

     cheque.
  ■ Make sure there is enough money in your account when debit

     orders come off your account.
  ■ Many credit cards offer reward’s programmes, find out how they

     work and get more value.
  ■ Always check your bank statements to make sure everything

     is correct.
  ■ Ask us, at Absa, whether you qualify for one of our banking

     accounts designed for lower income people, which offers very
     reasonable fees.
  ■ Always deposit your salary into one transactional account and

     transfer funds from there.
  ■ Choose the bank account that suits your requirements – there

     are some current accounts that offer you great services at very
     reasonable rates.
  ■ Remember, it’s cheaper to do banking at an ATM or through

     Internet, Telephone or Cell phone Banking. If you haven’t regis-
     tered, do it today and save yourself additional banking fees.
  ■ You must clearly understand the bank charges you will pay and

     what benefits and value you will receive. This will also help you
     take better charge of in knowing how your accounts work and
     what you are paying for.




                                                                                   Sponsored by Absa in the interest of financial literacy

				
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