Insurance Basics

Introduction

Insurance is a way to protect yourself from a large loss that you could not afford alone. You pay a regular premium. In return, the insurer agrees to pay for certain losses. It works by pooling risk: many people pay, and the few who suffer a loss are paid.

Insurance rules and products differ by country. This is general education, not advice about what you should buy.

What insurance is for

Insurance is best for large, unlikely, costly events, such as a car accident, a house fire, a serious illness or an accident that leaves you unable to work. It is usually poor value for small, predictable costs that you could cover from savings.

Common types

• Health insurance: covers medical costs, where not provided by a public system.
• Motor insurance: often legally required for drivers. Covers liability and sometimes your own vehicle.
• Home or contents insurance: covers damage to a building and belongings, often required by mortgage lenders.
• Renters insurance: covers your belongings and liability if you rent.
• Life insurance: pays a sum to dependants if you die, mainly useful if others rely on your income.
• Income protection or disability insurance: pays part of your income if illness or injury stops you working.
• Travel insurance: medical and cancellation cover abroad.
• Professional liability insurance: for self-employed people whose mistakes could cost clients money.

Key terms

• Premium: the price you pay.
• Excess or deductible: the part of a claim you pay yourself. A higher excess usually means a lower premium, but you must be able to afford it.
• Limit: the maximum the insurer pays.
• Exclusions: things that are not covered. Read these carefully.
• Claim: your request for payment.

Example: a policy with a 250 excess and a repair cost of 1,000 pays 750 and you pay 250.

Choosing wisely

• Decide what you cannot afford to lose and insure against that first.
• Compare several quotes, and compare cover, not only price.
• Read the summary of cover and exclusions.
• Answer questions honestly. Mistakes or missing information can lead to a claim being refused.
• Avoid duplicates: you may already have cover through an employer, a bank account or a card.
• Be cautious with add-ons you do not understand, and with products sold under pressure.
• Review yearly, since your needs and prices change.
• Keep documents and receipts for valuables.

Claims

Report problems promptly, follow the insurer's process, keep evidence, and ask for reasons in writing if a claim is refused. Many countries have an independent complaints service you can use.

Try it yourself

List your five biggest financial risks, such as job loss or a car accident. For each, note whether you have cover, savings or neither, and what you could do.

Summary

• Insurance pools risk, and protects against large, unlikely, costly losses.
• Know premium, excess, limits and exclusions, and compare cover and not only price.
• Be honest in applications, avoid duplicate cover, and review each year.