Insurance can be used to protect you against the negative financial consequences of unexpected events. In simple terms by paying someone else to take on the risk on your behalf.
For example, car insurance passes the financial cost of damage to your car or damage done by your car in an accident to the insurance company.
Despite there being may different types of insurance they all basically function in a similar way. The key attributes of insurance are as follows:
Example: Jane is renting a one bedroom apartment and is concerned about the risk that her possessions could be lost if something happened to the apartment such as a fire or if the apartment was broken into. She takes out a Home Contents insurance policy to protect against the risk. She estimates that her possessions are worth $25,000. The insurance company provides a quote for the insurance of $500 p.a with a $250 excess.
Risk being insured – loss or damage to Jane’s property
Amount of insurance coverage – $25,000
Premium – $500
Excess – $250
Unfortunately a thief breaks into her apartment while she is at work and steals her laptop and some of her jewellery. Jane puts in a claim with the insurance company and after providing evidence of the theft using a police report as well as receipts for the purchase of her laptop the claims assessor estimates that the cost of replacing her laptop and
jewellery is $4,000. After paying the $250 excess, Jane has $3,750 to offset the cost of the stolen items.
Note that the insurance coverage of $25,000 this is the maximum amount that could be paid out, however the insurance company will only ever pay out for what has actually been lost.
All insurance products will have a Product Disclosure Document which will outline key information about the products that they sell. This will include a lot more detail than what is usually on their websites.
The insurance policy document will outline key information that is specific to your policy such as exactly what is covered, the amount of cover, your premium and excess. Ensure you understand the information in the policy before you sign up and do not be afraid to ask your insurer to explain anything that isn’t clear.