Insurance - Insuring the big costs if it goes wrong

How insurance works

Buying an insurance policy transfers the risk from us to an insurance company.

Insurance may seem complex, but it is really quite simple. We pay an amount of money, called a premium, to an insurance company. If an unexpected event occurs and it is covered by the wording of our policy, our insurer repairs or replaces the items that are lost or damaged, or pays us a sum of money.

What insurance do I need?

How much insurance we need will depend on our own circumstances and attitudes. It’s easy to buy too much insurance. It’s just as easy to not buy enough.

When considering getting insurance we need to weigh up the risks of not having the insurance against the costs of buying it. Ask these four questions:

1. What is the risk I would be insuring against? This could be death, a fire at home, or the car getting stolen. Or getting sick and not being able to work.
2. What are the chances of it occurring? There’s probably a small risk of a fire in your home, but it will cost a lot if it happens. The chance of your car being damaged or stolen is much higher, but the costs probably won’t be as high as losing your home.
3. What would happen? Would your family be able to pay for funeral and legal expenses in the event of your death, and how would they manage without your income? If there was a fire in your home, would you be able to replace the house (if you own it, that is) and all your possessions, or would you lose them completely?
4. How much would it cost? Would you have enough money saved to cover the cost and would you want to use your savings for this? (Would you be forced to dip into your retirement savings?)

If you can’t afford for something to happen, you should seriously consider taking out insurance.

Insurance is important when we’d be badly affected by a loss – even one that is not very likely to happen. It’s less important to have insurance for losses that we could cope with.

Types of insurance

Buying insurance

There are many different types of insurance cover and insurance policies. An insurance company or insurance broker can explain how policies work, find the best one for our circumstances, and even help us lodge claims.

Some financial advisers can also help us with insurance needs.

Insurance companies, insurance brokers and financial advisers now have to be registered on the official government Financial Service Providers Register (FSPR). Search the register to check if a company or adviser is registered.

They must have a complaints process in place and belong to one of the following dispute resolution schemes:

1. Insurance & Financial Services Ombudsman
2. Banking Ombudsman
3. Financial Services Complaints Limited
4. Financial Dispute Resolution

Tips for buying insurance

It’s important to check your coverage each year when you renew your insurance, or whenever your circumstances change.

1. Have an emergency fund. Having some money of your own available for emergencies means you can take on some of the insurance risk yourself. This way you can reduce the cost of insurance.
2. Choose the right excess. When choosing a high excess, the premium will be lower, because the insurer is covering less of the cost. But the trade-off is that you’ll also have to pay more for each claim. It’s good to choose a policy excess that matches the point at which it would become a struggle to make the payment.
3. Be honest: By law you must give all information requested by the insurer. Leaving any important information out could risk future claims being turned down.
4. Read the policy carefully. You need to understand what is, and isn’t, covered by the policy. It’s important to take the time to check it and ask the insurer to explain anything that isn’t clear.
5. Don’t double up. Some of us already have some types of insurance – for example through work or as part of a loan agreement.
6. Shop around. It pays to get a range of quotes and compare, looking closely at what is and isn’t included by each policy.
7. Combine insurance. Buying as much insurance as possible from one company can save money, so it’s good to consider the options and see what’s best for you. As always, you need to consider the product and price to gauge if it’s worth it.
8. Look for an insurer with a good credit rating. The higher the rating, the more certain you can be about the company’s ability to pay claims and be around for the long term.
9. Take precautions. There are things you can do to your home and car, such as installing an alarm, which can reduce the premiums you pay.

Choosing the right cover

The more you understand your policy and its exclusions, the less likely you are to be disappointed when you make a claim.

Not all insurance policies are the same. It’s easy to compare two policies on price, but the cover we get may be very different.

A trauma policy may only cover certain named diseases, not all critical illnesses or injury. Cheaper house policies cover specific events such as fire, flood, burglary or theft, not all risks.

Some policies will pay to replace an item that is damaged or stolen. Others may only pay ‘present value’. That is the cost of replacement less a percentage according to how old the item is. There’s more information on the Insurance Council website.

All insurance policies have exclusions and conditions in the fine print. These exclusions may be for events such as gradual damage to a property, claims where a driver is under the influence of alcohol, or medical conditions that existed before the policy was taken out.

The key thing is to read the policy carefully (even the fine print!) and get clear on what it covers. Otherwise we could be paying money for a policy that may not pay out when we want to claim.

Making claims

The insurer may choose to pay a sum of money to settle the claim. They can also repair or replace the item you have claimed for. Most policies have an excess, which is the first portion of a claim that you have to pay.

It never pays to exaggerate a claim or tell a lie. Insurance companies are very wary of fraud and will use an investigator if they believe you are not telling the full truth.

Contact your insurer or insurance adviser directly if you need to find out about making a claim.