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?
We all probably need some kind of insurance, but not everyone needs all the different kinds.
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:
- 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.
- 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.
- 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?
- 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
When buying insurance directly from insurance providers, it helps to shop around and compare quotes and cover. Most of this can be done online.
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:
- Insurance & Financial Services Ombudsman
- Banking Ombudsman
- Financial Services Complaints Limited
- Financial Dispute Resolution
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.
If you do need to make a claim, it’s important to tell the insurer as soon as possible. Sometimes you can report the claim over the phone. Often you’ll need to fill in a written claim form and supply documents to support the claim.
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.