What is an insurance and how does it help me prepare for the unexpected?

What is insurance?

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.

How does insurance work?

Despite there being may different types of insurance they all basically function in a similar way. The key attributes of insurance are as follows:

• Risk being insured – The risk that is being protected against. Examples could be loss or damage to your home, loss of income if you are sick of injured or cost of missed flights
  while on holiday.
• Amount of insurance coverage – the financial amount that is paid out in the event of an insurance claim being made. This amount is agreed with he insurer upfront and is
  recorded in the insurance policy
• Premium – this is the cost of the insurance. Premiums are usually reviewed at least annually and can sometimes be paid monthly rather than in a lump sum. The price of the
  premium is impacted by the likelihood of the risk occurring, the amount of coverage and the amount of the excess.
•  Claims – You can make a claim against the insurance company if the risk that have been covered eventuates. Often you will need to provide evidence of the loss and confirm the
  loss was accidental or unexpected. For example a car insurance claim is unlikely to be paid if you purposefully crashed your car. Claims are often verified by the insurance
  company by an insurance assessor who will review the claim and confirm the risk is covered by the policy, assess the amount of loss and calculate the payout.
• Excess – This is an amount that you will be required to contribute towards the loss when you make a claim

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.

Where to find out the details of an insurance policy?

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.