Factsheet: What is insurance?

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ONLINE TEXT VERSION - June 2008

Insurance Factsheet #1 

Insurance helps protect you from financial loss when things go wrong. For example:

  • your mobile phone could fall out of your pocket and break while you're travelling (and you need a new one)
  • you might be injured in a car accident (and you have to pay for treatment and the cost of repairs to your car).

While having insurance can give you peace of mind, it's not like a savings account, where any money you pay in belongs to you. What you can claim back from the insurance company depends on what's covered in your insurance policy.

How does insurance work?

Depending on what you are insuring against, the insurer agrees to pay you money to help cover costs if that thing happens.

For example, if your laptop was stolen from your home, and you had insured it against theft, you could make a claim with your insurer to help cover the costs of getting a new laptop.

This is called a 'transfer of risk' because the insurer is taking the risk of meeting the cost of the loss. Without insurance, you are taking the risk that you will have to wear the financial loss if things go wrong.

What can you insure?

You can buy different types of insurance policies that cover a range of risks, depending on what you are insuring.

Insurers offer policies with different features, so make sure you choose a policy that is right for you.

What is an insurance policy?

You and the insurer agree on what is being insured. This is written in a legal agreement (contract) called an insurance policy.

The insurance policy sets out exactly:

  • what is being insured and the risk being insured against (terms and conditions)
  • any exclusions
  • how much the insurer will pay if you make a claim
  • how much the policy will cost you (premium).

The premium can depend on things like where you live or what you and the insurer agree will be the cost of replacing something if it's stolen or damaged. The premium is less than the total cost of what you are insuring.

How can you get insurance?

You can buy insurance directly from the insurer or from an insurance broker. Insurance brokers are not employed by the insurer and may be able to help you get a better deal.

If you are thinking of buying insurance from a broker, make sure they are licensed by ASIC, or that they work for someone who is licensed by ASIC.

What you insure Types of policies
Your holiday Travel insurance
Your property Car insurance, home insurance and contents insurance, boat insurance
Your person Health insurance, life insurance (including income protection insurance, total and permanent disability insurance, term life insurance and sickness or accident insurance)
Your business Business insurance, professional indemnity and public liability insurance
Your loans Consumer credit insurance

Facts:

  • Insurance helps pay your expenses or covers your losses when things go wrong.
  • You and the insurer agree on what is being insured and how much it is being insured for.
  • By paying for insurance, you are 'transferring the risk' of having to pay - if something goes wrong - to the insurer.
  • You can only claim on your insurance if the thing that goes wrong is covered in your insurance policy.

Some reasons to insure

  1. Insurance can help you replace something you own and could not afford to replace. For example, if your home was destroyed in a fire, you would need a big lump sum to rebuild it.
  2. Insurance can protect you from something that might not happen, but which would be bad for you if it did. For example, if you were injured in an accident and couldn't work anymore, you would need money to live on.
  3. Insurance can help you pay off a debt if something you've bought with a loan is damaged or destroyed. For example, if you took out a loan to buy a car and the car was written off in an accident, you would need money to pay off the loan.

Excess

Some insurance policies include an excess. This is how much you must pay out of your own pocket on any claim.

For example, if you have a car accident, the total cost of repairing your car might be $2,000. If you have an excess of $500, you would have to pay the first $500 and the insurer would pay the remaining amount, $1,500.

Sometimes an excess might be compulsory (for example, on car insurance for young drivers). In other cases, you can choose to pay a higher premium to reduce or remove the excess. Generally, the higher the excess you're willing to pay, the lower your premium.

Waiting period

Some insurance policies have a waiting period. This means that you must wait for a certain period of time after you buy the policy before you can make a claim. For example, you may have to wait 12 months before you can claim the cost of going to the dentist or having a baby on a private health insurance policy.

You may be able to change the waiting period for some policies. If you choose a longer waiting period, you may pay a lower premium. You need to decide whether you can afford to wait for your insurance benefit.

Exclusions

Exclusions are things that aren't covered by your policy. This means that the insurer won't cover your costs if these things happen.

Value

Some insurance policies include a value (or cost) for what you are insuring. This is based on what the insurer will pay you if you have to claim on your insurance:

  • Agreed value - This means that the insurer will pay you a fixed dollar amount as stated in your policy. (There may be some deductions, for example, an excess.)
  • Market value - This means that the insurer will pay the value of the item based on its current age and condition at the time of loss (for example, cars or laptop computers may lose their value quickly and the insurer will only pay you much less than what it cost you to buy, or to buy a replacement).
  • Replacement cost - This means that the insurer will cover the cost of replacing the item with a new one, regardless of its current age and condition.

The value (or cost) you insure for can affect the premium you pay upfront. For example, your premium might be cheaper if you insure for market value.

Claims

A claim is when you ask your insurer to pay for something that is covered by your insurance policy. You can only claim on your insurance if the thing that goes wrong is covered in your insurance policy.

When you're shopping around for insurance, look for claim procedures or conditions in the policy. How the insurer deals with claims will be important to you if you need to make a claim later on.

Get on the web

Typical exclusions from cover (where the insurer will not pay) Type of policy
Any illegal behaviour, such as driving while drunk Car insurance
Modifications to your car (for example, the addition of spoilers) Car insurance
Adventure sports such as bungee jumping, white-water rafting, skiing and scuba diving Travel insurance
War/terrorist damage Travel insurance, life insurance, contents insurance
Your luggage is stolen while left unattended in a public place Travel insurance
Damage caused by floods Home insurance and contents insurance, car insurance
Damage caused by a failure to maintain or repair the insured property (for example, rain gets into your house through a hole in the roof that you knew about but didn't repair) Car insurance, home insurance and contents insurance
Cosmetic surgery Health insurance

Under your duty of disclosure you must tell the insurer all relevant details you know when you buy a policy and when you make a claim.

Do you need it?

This table is a guide to when you may require different types of insurance. There may also be other circumstances not listed here, so always look carefully at your situation and shop around for the best cover.

Type of insurance When you might need it Why you might need it How you can get it

Travel insurance

(Refer to Fact Sheet 3 for more info and exclusions.)

Any time you travel or go on holidays overseas, and for travelling within Australia when you have expensive items. To cover you in case you lose your luggage, miss your plane or train, are in an accident or have a medical problem travelling overseas. Travel agent, insurance company or brokers.

Car insurance

(Refer to Fact Sheet 4 for more info.)

When you own a car or when you drive the family car. You have to get compulsory third party insurance when you register your car. Additional insurance can cover you when you're in an accident, or if your car is stolen, broken into, or breaks down. Insurance companies and some car dealers or a broker.

Home buildings insurance

(Refer to Fact Sheet 5 for some more info.)

When you own your own home. To cover your home in case of fire and other defined events. Insurance companies or brokers.

Contents insurance

(Refer to Fact Sheet 5 for more info.)

When you move out of home, whether you're renting or you own your own home. To cover your property in case of burglary, fire, and other defined events. Insurance companies or brokers.

Health insurance

(Refer to Fact Sheet 6 for more info.)

When you're no longer covered under your family's policy (if they have one). To cover you for injury, or medical or dental treatment. Private health insurance providers or brokers.

Life insurance

(Refer to Fact Sheet 6 for more info.)

When you depend on your income to cover bills and living expenses. To cover you if you can't work due to an accident or illness, or if you die. Life and general insurance providers, your super fund or brokers.

Consumer credit insurance

(Refer to Fact Sheets 4 and 6 for more info.)

If you think you may have some difficulty in meeting some of your loan/ credit repayments. To cover you if you can't repay some of your loan because you are unable to work. Your loan or credit card provider or brokers.

Last updated: 06 Jul 2018