Insurance

What is insurance?

Insurance is a type of risk management plan that takes into account the probability of something happening and the likely compensation required in such an event. The principles of insurance relate to the possibility of negative incidents occurring.

When an insurer pays compensation to a claimant they lose money, so an insurer must manage the money they receive via premiums against the risk of a consumer making a claim. The more claims paid out by an insurance company, the higher the premium they will charge to cover the outgoing money.

Although the amount paid as a premium does not directly equate to the amount you will receive as compensation, the premium you pay represents a degree of coverage, which in turn limits the amount received in compensation. Underinsurance is the name given to inadequate financial coverage in which the consumer cannot claim enough money to compensate for a situation.

Consumers insure any number of things, usually their possessions and/or their livelihood, because they feel that the consequences of losing these things outweigh the premium they pay as insurance. Insurance provides peace of mind and financial protection against disaster where the consumer seeks to gain something from a loss that might occur.

Types of insurance

There are many types of insurance that cover a number of scenarios and possibilities, including insurance for businesses and pets. The most common types of insurance taken by individuals are those specific to possessions, such as car insurance and home and contents insurance, and insurance that protects livelihood, such as health and life insurance, income protection and travel insurance.

• damage to your vehicle;
• any damage that your vehicle might cause in an accident, including personal injury; and
• theft of the vehicle.

The insurance provider determines the premium based on the perceived risk, which usually takes into account the age and experience of the driver, the type of vehicle and its condition. Providers will often justify their perception on statistics, so any evidence that drivers of a particular demographic are more likely to make a claim may mean that certain groups will pay a higher premium in order to buy insurance.

Home and contents insurance protects a consumer against damage to their property, such as damage caused by an accident, natural disaster or vandalism, and theft of possessions in the house (contents). An insurer may take into account the location and type of property, presence of security and the value of the contents in assessing the probability and cost of a claimable incident. The amount a consumer will pay as a premium will reflect the insurer's perception of the risk.

Health insurance ensures that in the event that the consumer needs medical attention, the insurance provider will compensate the consumer for the expense incurred. There are different types of health insurance that cover different things - some types cover only basic preventative treatment, such as dental checks, while others include hospital stays and medical operations. Again, the consumer will pay a premium requisite with the insurer's perception of risk, based on the likelihood of the consumer making a claim. If you are in poor health, or have a pre-existing condition, you can expect to pay more to take out an insurance policy.

Income protection is a form of welfare initiated by a consumer to cover the event of a loss or drop in income. Income loss may occur through circumstances like redundancy or illness, so this type of insurance will ensure that the claimant will continue to receive income in such a situation. The amount the consumer pays as a premium will determine the conditions of a claim including the amount of compensation, the length of time covered and in which situations the claimant is entitled to money. It is wise to buy this type of insurance if you make regular debt repayments so you can still meet them if you suffer income loss.

Travel insurance is a special type of insurance that covers a number of situations you may encounter out of your usual environment, including transport problems, such as delayed or cancelled flights, medical emergencies or theft. Again, the amount you pay as a premium will affect the level of coverage and the amount you can expect to receive as compensation in the event of a claim.

Where to buy insurance

There are a number of insurance providers that deal with specific types of insurance, for example dedicated car insurers or health insurance companies. There are also general insurance companies that provide policies for a number of situations.

Many unions provide income protection insurance and sometimes a consumer can purchase insurance for an item at the point of sale.

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