Sometypes of insuranceyou have to take out by law such asmotor insuranceif you drive a vehicle; some you may need as a condition of a contractsuch asbuildings insuranceas arequirement of your mortgage; and others are sensible to take out such aslife insuranceor saving forapension.
While it is a good idea to make sure you are not paying for insurance that you don’t need, you should always think about what would happen if disaster struck and you didn’t have cover to protect you.
You can buy insurance policies for manyaspects of your life, for example for your health, home, car, business, or retirement.
An insurance policy isthe contract that you take out with an insurer to protect you against specific risks under agreed terms.
How it works
When you buy a policy you makeregular payments, known as premiums, to the insurer. If you make a claim your insurer will pay out for the loss that is covered underthepolicy.
If youdon’t make a claim, you won’t get your money back; instead it is pooled with the premiums of other policyholders who have taken out insurance with the same insurance company. If youmake a claim the money comes from the pool of policyholders’ premiums.
To decide on the type of insurance you need think about:
- why you needcover
- whatyou wantto include in your cover
- how much you can afford
- how long you might need cover for
- whether you want cover for yourself and / or for loved ones
Tobuyinsurance cover you can:
- contact an insurerdirectly,either onlineor over the phone
- seek professional advice throughaninsurance broker viatheBritish Insurance Brokers' Association (BIBA)
- speak to anindependent financial adviser through theAssociation of Professional Financial Advisorsand / orunbiased.co.uk,acomprehensive website where you can find specialist, professional financial advisers
- check comparison websites to get the best dealon the type of policy you're looking for
- for more information seehow to buy insurance
How premiums are calculated
Insurers use risk data to calculate the likelihood of the event you are insuring against happening. This information is used towork out the cost of your premium. The more likely the event you are insuring against is to occur,the higher the risk to the insurer and,as a result,the higher the cost of your premium.
An insurer will take two important factors into account when working out the premium they will charge.
- How likely is it in general terms that someone will need to make a claim?
- Is the person who wants to take out a policya bigger or smaller risk than the ‘average’ policyholder (for example, a young person with a high-powered car may be charged a higher premium as they are statistically more likely to be involved in an accident than a mature, experienced driver)?
Only a proportion of policyholders will make a claim in any one year.
Standardpolicy conditions
Although policies have differentterms and conditions, in general there are three main principles that are common across allinsurance policies. These include:
- coveris provided for theactual value of the property or item that has been lost or damaged (its replacement value), butdoes not include any sentimental value
- there needs to be a large number of similar risks so that the likelihood of a claim can be spread among other policyholders. It must be possible for insurers to calculate the chance of loss so that a premium can be set which matches the risk
- losses must not bedeliberate
For more information
- read ourhow to buy insurancepagefor information about shopping around
- readtheABI guide on insurance in the UK –the benefits of pricing risk (pdf 1.57MB)to find out more about how insurance works
