Many people balk at hearing the word insurance, but there is nothing mysterious or daunting about insurance. In fact, buying insurance is a good way to protect yourself from a range of adverse occurrences.
The insurance market covers a wide range of areas, such as home, car, personal, medical, travel, accident and life, to mention a few of the common insurance policies available. However, the insurance market is not limited to these insurance types, there are others that address retirement needs, disability, commercial risks and more esoteric coverages like terrorism or war insurance.
First of all, what is an insurance policy? An insurance policy is a binding contract between an insurer (e.g. insurance company) and insured (e.g. customer), whereby the insurer agrees to compensate the insured, if they suffer a loss. This, in technical terms is called ‘transfer of risk’. The insurance company takes on the risk of a specific occurrence, such as death, injury, theft, etc., and by receiving a premium payment from you, will compensate you, when such an occurrence happens.
The insurance company uses statistics to calculate the premium on any given contract, based on the risk itself, the number of people buying the insurance coverage and the probability of a pay-out. So, generally the premiums will vary depending on the risk of the occurrence you are looking to cover.
Generally, consumer insurance is categorised by two broad segments: general insurance and life insurance. General insurance is divided into six broad categories: home, vehicle, income protection, public liability, personal accident and travel. Although this list does not cover all the general insurance policies available on the market, these are the most common policies that are provided by insurance companies to consumers.
The second category of insurance is life insurance. Under a basic life insurance policy, the insurance company agrees to pay a sum of money upon the death of the insured person. However, life insurance policies nowadays are closer to an investment product, as in many cases the insurance company takes your premium payments and invests them for you to add value to the policy.
The types of coverage available can be broadly divided into two categories: defined event and accidental loss. In defined event coverage, the insurance policy will cover a loss or damage from a list of ‘defined’ events that are listed in the policy itself. For example, for home insurance, this may include damage due to such events as lightening, fire, flood and so on. However, if a tornado destroys your home and it is not on the defined events list, you will not be covered. Therefore, it is important to consider which risks are most important for you to cover.
Under accidental loss or damage, the insurance company will compensate for loss or damage occurring accidentally. For example, for travel insurance that could mean theft of your belongings. However, in most cases the insurance company will either cap the amount they will compensate and/or include exclusions in your insurance policy. Because of this, make sure you always read the insurance policy carefully, especially the fine print!