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Insurance

Sometimes in life things go wrong. If your house burns down, an earthquake strikes, your car is involved in a crash or you fall ill, you may face large costs which you can’t afford. The risk of some of these things happening may be small. But if they did happen, the impact on your finances could be huge. You can either face these risks yourself or take out insurance to cover them.

How insurance works

Buying an insurance policy transfers the risk from you to an insurance company.

Insurance may seem complex, but it is really quite simple. You pay an amount of money called a premium to an insurance company. If an unexpected event occurs and it is covered by the wording of your policy, your insurer pays you a sum of money or repairs or replaces the items that are lost or damaged.

What insurance do you need?

You probably need some kind of insurance, but not everyone needs all the different kinds.

How much insurance you need will depend on your own circumstances and attitudes. It’s easy to buy too much insurance. It’s just as easy to not buy enough.

When you consider getting insurance you need to weigh up the risks of not having the insurance against the costs of buying it. Ask yourself these four questions:

  1. What is the risk you would be insuring against? This could be death, a fire in your home, or your car getting stolen. Or getting sick and not being able to work.
  2. What are the chances of it occurring? There’s probably a small risk of a fire in your home, but it will cost a lot if it happens. The chances of your car being damaged or stolen is much higher, but the costs may not be as great as losing your home.
  3. What would happen? If you died, would your family be able to pay for the funeral and legal expenses, and how would they manage without the income you earned. If there was a fire in your home, would be able to replace the house (if you own it) and all your possessions, or would you lose them completely?
  4. How much would it cost? Would you have enough money saved to cover the cost and would you want to use your savings for this?  (For example, would you want to dip into your retirement savings?)

If you can’t afford for something to happen, you should seriously consider taking out insurance. Insurance is important when you’d be badly affected by a loss - even one that is not very likely to happen - a nd it’s less important to have insurance for losses you could cope with.

Buying insurance

There are many different types of insurance cover and insurance policies. An insurance company or insurance broker can explain how policies work, find the best one for your circumstances, and even help you lodge your claims.

Some financial advisers can also help you with your insurance needs.

Insurance companies, insurance brokers and financial advisers now have to be registered on the official government Financial Service Providers Register (FSPR). You can search the register to check if a company or adviser is registered.

They must have a complaints process in place and belong to one of the following dispute resolution schemes:

  1. Insurance & Savings Ombudsman
  2. Banking Ombudsman
  3. Financial Services Complaints Limited
  4. Financial Dispute Resolution

If you are buying insurance directly from insurance providers, make sure you shop around and compare quotes and cover. A lot of this can be done online.

Tips for buying insurance

Tip: Review your insurance regularly and whenever your circumstances change.

  1. Have an emergency fund: If you have some money of your own available for emergencies you can take some of the insurance risk yourself. This will allow you to reduce the cost of your insurance.
  2. Choose the right excess: If you have a high excess, the premium will be lower, because the insurer is covering less of the cost. But you will also have to pay more for each claim. Choose a policy excess that matches the point at which you would struggle to make the payment.
  3. Be honest: By law you must give all the information requested by the insurer. If you leave any important information out you could risk a claim being turned down.
  4. Combine your insurance: Buying as much of your insurance as possible from one company can save you money.
  5. Read the policy carefully: Understand what is, and isn’t, covered by your policy. Take the time to check it and ask your insurer to explain anything that isn’t clear.
  6. Know what insurance you already have: Think about what insurance you already have – for example with your employer or as part of a loan agreement. Don’t double-up.
  7. Shop around: Get a range of quotes and compare, looking closely at what is and isn’t included by each policy.
  8. Look for an insurer with a good credit rating: The higher the rating the more certain you can be about the company’s ability to pay claims and be around for the long-term.
  9. Take precautions: There are things you can do to your home and car such as installing an alarm that can reduce the premium you pay.

Choosing the right cover

Tip: If you read and understand your policy and its exclusions you are less likely to be disappointed when you make a claim.

Not all insurance policies are the same. It’s easy to compare two policies on price. Yet the cover may be very different.

Some insurance policies may limit your cover. A critical illness policy may only cover you for certain named diseases, not all critical illnesses. Cheaper house policies cover specific events such as fire, flood, burglary or theft, not all risks.

Some policies will pay to replace an item that is damaged or stolen. Others may only pay ‘present value’. That is the cost of replacement less a percentage according to how old the item is. Find out more on the Insurance Council website.

All insurance policies have exclusions and conditions in the fine print. These exclusions may be for events such as gradual damage to a property, claims where a driver is under the influence of alcohol, or medical conditions that existed before the policy was taken out.

Make sure you read and understand your insurance policy.  Otherwise you could be paying money for a policy that may not pay out when you want to claim.

Making claims

If you need to make a claim, tell your insurer as soon as possible. Sometimes you can report the claim over the phone. Often you will need to fill in a written claim form and supply documents to support your claim.

Your insurer may choose to pay you a sum of money to settle the claim. They can also repair or replace the item you have claimed for. Most policies have an excess, which is the first portion of a claim that you have to pay yourself.

Be careful - understand what you are entitled to when you make a claim. Never try to exaggerate a claim or tell a lie. Insurance companies are very wary of fraud and may use an investigator if they believe you are not telling the full truth.

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