A Guide To Insurance

Insurance is a way of protecting yourself, your family and your belongings against a particular adverse event, such as an illness which may result in you losing your income or an incident such as a burglary.

Should one of these events occur, an insurance policy will then pay out either an agreed sum of money or an amount that will cover the damage to or loss of personal effects as appropriate. Of course the event or incident that you are seeking to protect yourself from may not happen but, you have to decide whether you are willing or able to take that risk. If it does happen and you are not insured against it you may well have enough savings to be able to manage but, in the event that you do not, insurance may very well help.

This section will explain how insurance works, the main types of things that you can insure, and things to think about to help you decide whether or not you need insurance.

There are lots of different types of insurance cover available and it can be confusing, so the aim here is to help you think about your insurance needs and to ask the right questions. Please note that advice on which insurance policy or policies to buy or where to buy them from is not available from the Commission.

Some types of insurance are compulsory. Motor insurance is a good example - you are required by law to have motor insurance if you drive a motor vehicle.

How insurance works
The amount you pay for an insurance policy will be based on the information you provide to the insurance company and the type of risk(s) that you want to insure against.

Insurance companies use underwriting criteria (for example, where you live, your age, medical details such as whether you smoke or not) to help them work out the price (or premium) of the insurance cover that they will offer to provide.

In providing you with insurance cover, an insurance company agrees to pay out if the event which you are insuring against happens. For example, a travel insurance policy may pay out for the loss of your luggage when travelling.

It is very important that you give an insurance company the correct information when buying insurance cover, as incorrect information may affect or even invalidate your claim.

You can often pay for an insurance policy by either paying one sum for the whole year (or sometimes a longer term) - this is called a single premium - or by paying premiums regularly (for example, monthly). Regular premiums can often be paid by direct debit.

You can choose which insurance company's policy to buy yourself (by contacting the company directly or using the internet) or you can go to an insurance broker, who will help you find the right cover and will usually assist in collecting your premiums.

There are some types of insurance which are designed to be long term, such as life insurance. Most other types of insurance are designed to provide you with cover for one year at a time and then, when your policy expires, you can either renew it with the same insurance company or shop around for a better deal. If you do switch your policy, make sure that you don't lose out and always check that a new policy covers what you need it for. Always compare what is covered by a policy, not just the price alone. Some policies may be cheaper than others, but they may not offer the same level of protection.

Tips to help you consider whether to take out insurance cover
It is easy to live day to day without thinking about what we would do if the unexpected happened. But how would you or your family cope financially if you were to lose your job or suffer a serious illness?

The following points may help you to reflect on your current situation and identify any areas where you feel that you may need some (new or additional) insurance cover:

Do you need insurance? Think about how you would cope if you had to pay to replace items that were stolen or damaged, or how you would manage if you lost an income.

What would happen if you, or your partner, became seriously ill or unable to work due to illness?
There are insurance policies, sometimes known as protection products, that pay out in these instances however, they usually only pay out a lump sum for a limited time and do not cover all illnesses. Always check the exclusions before you take out a policy. Types of protection insurance include critical illness cover, income protection and payment protection insurance.

What would happen if you or your partner died suddenly? Would your family be able to manage without the income? Life insurance is designed to provide some financial security for people who depend on you in the event of your death. It is also a good idea to check what your pension plans might pay out if you died.

Are you a home owner?
If your home was destroyed by fire or flood you would still have your mortgage to pay. Most lenders insist that you take out buildings insurance in conjunction with your mortgage, but you should make sure that the amount covered by the policy would be enough to rebuild your house.

What about your belongings? Whether you own your home or are renting, it is your responsibility to ensure that your belongings and valuables are protected. Contents insurance covers the loss of or damage to the contents of your home, for example, furniture, electrical items, jewellery and other valuable items that you may carry outside of your home. Take time to work out the value of your belongings, as it is all too easy to under-insure.

Are you travelling or going on holiday? Travel insurance can protect you against mishaps while you're abroad. The cover provided by a travel insurance policy may include lost luggage or theft, flight delays and bills for medical treatment required whilst overseas. Do make sure that you read the policy summary for exclusions - there are bound to be some.

What about medical or dental treatment? If you think that you may need medical treatment and would want to be seen more quickly than you might be if using state-provided health care then health insurance may be worth considering.

Do you own a car? The law requires you to have motor insurance if you own or use a motor vehicle, but you may want to increase your cover, for example to replace a written-off car.

Do you have pets? Animals can present you with nasty surprises in the way of vet's bills. Pet insurance can pay towards a vet's bill, or for kennel / cattery fees if, for example, you have to suddenly go into hospital.

Before you take out any insurance cover always remember to check the details of the policy so that you are sure that it covers you for what you need it to.

Buying insurance
Most insurance is not compulsory. It is up to you to decide what you may need cover for and you may want to seek advice to help you do this.

Things to think about before you buy
Once you have decided that you want to buy some insurance, get a few quotes from different companies. Make sure you compare like with like and do not buy on price alone - check what each policy covers and what it does not cover (the exclusions).

If using comparison websites, bear in mind that none of these cover the entire market and some larger insurers are not represented on these websites. Also, some websites may ask you fewer questions in order to speed up the process and may instead make a number of assumptions about you, so you must make sure that you check these are correct and update them where necessary.

Get financial advice if necessary. You can usually find insurance brokers or advisers on the high street, or your family or friends may recommend one.

Some questions you may want to ask before taking out insurance cover

What will the policy cover me for?

What won't it cover?

What else do I need to know about this policy given my particular circumstances?

Do I need to buy this insurance or am I possibly already covered by an existing policy?

Is there another insurance product that I should consider which may better suit my needs?

Could I get more or better coverage and will it cost me more?

Firms selling insurance
Firms selling insurance and those providing insurance cover (underwriting the risk) have to be regulated by a financial services regulatory body, or be the agent of a regulated firm.

Regulated firms and their agents have to meet certain standards and requirements. Always make sure that the firm you use is regulated before handing over any money. If they are not regulated, you most likely will not have access to complaints or compensation arrangements should things go wrong.

Get and give the full facts
Insurance policies differ in terms of what they cover and what they do not (the exclusions).
Whatever type of insurance you decide to take out, always: 

  • ensure that the firm is authorised and/or regulated to sell insurance;
  • disclose the full facts when applying for insurance - if you don't, you could invalidate your policy and the insurance company will not pay out in the event of a claim;
  • read the key policy information for exclusions, to ensure that you choose the right policy for you;
  • check for an excess - most policies make you pay a certain ‘excess’ amount before they pay out on claims, and some policies charge an excess per clause rather than one overall; and
  • shop around, but bear in mind that whilst some policies might be cheaper than others they may not offer the same level of protection.

Once you have insurance in place, check the level of what is covered from time to time and tell the insurance company promptly if your circumstances have changed, such as whether you have moved house or want to increase (or decrease) your cover.

What are the full facts?
Material facts are facts that you ought reasonably to know are relevant to the insurer’s decision whether to offer you insurance cover and at what price, so they must be disclosed.

This information will form the basis of a contract between you and the insurer. If you are asked a specific question in relation to obtaining insurance cover, you must respond honestly. It is no defence to say that you did not realise that the fact was material. If you do not disclose material facts, your policy may be invalidated and you will not be able to make a claim.

So make sure that you disclose everything, however irrelevant it may seem at the time.

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