Insurance is about protecting you and your family from financial hardship in the face of misfortune. It's a type of risk-management whereby you take out a policy with an insurer against a particular risk (eg. a car accident) and pay small sums of money in the form of an insurance premium, in order to be able to claim for a larger sum of money down the track if you're affected by an event covered under the policy.
What is an insurance policy?
An insurance policy is an agreement between the insurer and the insured, like a contract, that spells out exactly what is covered and claimable under the insurance policy, and what each party needs to do to keep the policy active.
All insurance policies available in Australia will have a Products Disclosure Statement (PDS), except Health insurance (which will have a product brochure) which you should read the carefully to make sure you understand what you are covered for, what exclusions may apply and how you can claim on the policy.
What types of insurance policies are there?
There are three broad categories for insurance policies: general insurance, life insurance and health insurance.
General insurance includes could provide cover for the things you own and value:
- home and content insurance: covers your home and contents against theft, loss and damage;
- car insurance: cover vehicles and property damaged in an accident you cause for others as well as yourself;
- pet insurance: cover the cost of veterinary bills for your pets up to a set limit;
- travel insurance: covers you for loss or illness while you're travelling.
Life insurance could provide cover for you, your family and lifestyle:
- income protection insurance: provides a regular income if you're unable to work for an extended period due to sickness or injury;
- funeral insurance: helps cover the financial burden of your funeral and other end-of-life costs when you die;
- accident or trauma insurance: provides financial assistance if you're affected by an accident or are a victim of trauma;
- life insurance: a lump sum provided to your beneficiaries as a legacy upon your death.
Health insurance covers the cost of medical bills related to hospital and ancillary services.
How does insurance work?
Firstly you need to choose the type of insurance you want and apply for a policy with the insurer of your choice. If your application is accepted and the initial premium paid, your insurer is required to cover you for any events covered under the terms of your policy as long as you continue to pay any required insurance premiums on time.
Insurance involves a 'transfer of risk', because your insurer is now taking the burden of meeting the cost of any loss you claim for, instead of all risk being borne by you.
Why should I take out insurance?
If you and your family have assets to protect, insurance is one of the best ways of doing it. For example, think about the home you've worked so hard to purchase. If it was destroyed in a bushfire, could you afford to rebuild it or purchase a new home? Chances are, without insurance, the answer would be no.
Also you need to think about your family's financial future. What would happen if you were injured and could no longer work? If you're the sole breadwinner for the family, you need to consider how you would pay the bills and cover your family's day-to-day costs of care. Income protection insurance can help you do just that.
Most of all, insurance is about security and peace of mind. It's good to know that you and your family will be covered if and when you need it most.
These articles are provided as reference material to allow more informed decision making, but are not intended as being a complete source of information on any topic. All readers should make their own independent analysis on the topic to make sure they have considered the aspects that are important to them.