AVIATION INSURANCE - 101
By Franz Smit
The complex world of insurance . . . sigh. This can be a lifesaving industry or one of the most frustrating exercises you will ever get into. In the next few weeks and months I hope to tackle all the myths, legends and challenges surrounding the insurance industry, with key focus on long-term insurance, as well as getting a few short-term specialists on board with their expert opinion and advice.
The Purpose of Insurance
The first thing we should do is cover the basics of how insurance works and what the purpose of insurance is. I know this seems obvious, but I have come across many people who don't truly understand this industry.
Insurance is not supposed to enrich anyone; it is there to compensate for loss. Be it loss of your income (disability/loss of license insurance), loss of possible future income (life cover), loss of limb or bodily function (impairment) or loss of quality of life (dread disease cover).
There are also certain limits to the amount of cover you may qualify for. These limits differ from insurer to insurer and are all justifiable. However, there are ways around them.
This is the most important part of the process. Getting the right person to assist and advise you on your insurance needs is a crucial first step.
The first thing to understand before applying for insurance is what the possible loss could imply for you, your family, and business/business partners. Without having a clear goal or reason behind insurance, it becomes little more than an unnecessary expense.
Things you should be taking into consideration:
∑ Total liabilities (house, car, plane, etc.)
∑ Total possible income (pension, rental income, trust income, etc.)
∑ Total cash needed (living expense, kids education, etc.)
∑ Estate duties: 20% of estate (R3 500 000 exempt per spouse)
∑ Might using a trust be good option?
There are a number of other factors to take into consideration, varying from person to person, but these are a few of the most important. An experienced broker will be able to assist you with these calculations, as well as advise you on any other points you may want to bear in mind.
Choosing the right Insurance Company
Choosing the right insurance company on your own is close to impossible. There are so many different companies, options, benefits and "loyalty programmes" that very often one can't compare like with like. This leads you to purchasing insurance for the wrong reasons. Watch out for too-good-to-be-true statements. If you are promised money back, be it in cash or some form of loyalty rewards program, the cost is factored in somewhere and you are most likely paying for it. If you don't use the loyalty or rewards program to your full benefit, you are probably wasting money that could be invested. Consider an alternative without the bells and whistles and see what you are left with as a saving.
What are Loadings and Exclusions?
Loading - Charging you 50% to 400% more because of occupation or health.
Exclusions - Excluding cover in certain events or under certain conditions.
Insurance companies look at loadings and exclusions in very different ways. Some would load you for flying less than 200hours PA, and others would load you for flying more than 200 hours PA, some for having less than 200 hours TT and other for having less than 500 hours TT. The trick is to get your broker to shop around and show you at least 3 different quotes.
I have clients with very similar experience, positions and flying profiles who have completely differently structured risk portfolios. This is one of the benefits of consulting a broker: an in-depth knowledge of the industry allows one to play the insurance providers off of each other, ensuring that the clients get the very best value for money insurance available on the market.
If you are braving the insurance world without a knowledgeable broker, be very careful to read your insurance contract and ask as many questions as possible. Luckily, the long-term insurance contracts read fairly easily and you should be able to find answers within 5-10 minutes. (If you aren't sure, send me a mail and I will be happy to find out on your behalf.)
However, if like most people, you don't have the time or know-how to tackle the myriad of forms and calculations, my advice is to use an independent broker who knows both the insurance and aviation industry.
I look forward to hearing suggestions and comments from you, and please ask me if there are any specific topics or issues would like me to cover.
What is the most important thing for you when looking at your personal long term insurance?
Franz Smit is the owner of www.pilotinsure.co.za acting under license of Netco Risk Management FSP no: 40265 providing independent financial advice. Franz specialises in the aviation industry.
Please note that this article is the opinion and an interpretation of the South African insurance industry by the author, and is not intended to malign any company or individual. Views may differ from other parties such as insurers or brokers. This article is meant as introductory information only and in no way constitutes advice. For tailored financial advice to suit your personal needs, please contact an independent financial advisor. All content is subject to copyright and may not be reproduced in any form without the express written consent of the author.
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