Understanding Insurance Basics: Your Guide to Financial Security

Insurance: The Absolute Basics

What are the basic principles of insurance and why is it important?

The information on this website is general in nature and does not take into account your objectives, financial situation, or needs. Consider seeking personal advice from a licensed adviser before acting on any information.

Insurance has often been considered by many as a necessary evil. But for the majority of people, insurance offers real security, peace of mind and forms a fundamental platform for a more certain financial future. Understanding the basics of insurance and how it works will be enlightening for many.

What is an insurance policy?

An insurance policy is a contract that establishes a binding legal relationship that is regulated by both the common law and legislation.

In other words, in some situations the law has been derived from precedents established in courts; in other situations the contract is specifically regulated by laws passed by Parliament.

There is also regulation by independent statutory authorities.

The insurance company is known as the "insurer"; the person who holds the policy is known as the "insured".

Consumer insurance is usually either General insurance or Life insurance.

Transfer of risk

The basis for insurance is "transfer of risk".

Time for a 2nd opinion on your Home & Contents Insurance?

We now offer a nation-wide panel of specialist Household Insurance brokers ready to help you lock down the best value home and contents insurance solution - tailored to your individual needs and guaranteed to save you money!

... Start your household insurance quote here ...

This means that the insurer agrees to compensate you if you suffer a loss.

Without the insurance you would have to pay for that loss yourself.

Obviously this contract is made on the basis that the insurance company calculates the risk that you, or the total number of people buying insurance, will cost more in payouts than what is received in premiums.

This is determined by the use of statistics and the information you disclose on your application for insurance.

General insurance

This includes ...

Home contents.
It can either be "defined event" i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire; or "accidental loss or damage" i.e. all accidental loss with some exclusions.

Motor vehicle.
It can either be "comprehensive" i.e. it covers any damage to your car as well as damage to the other car or another person's property; "third party property" i.e. it covers damage caused by your car to another person's property. This type of insurance will not cover you for the cost of repairs to your own car; "third party fire and theft" i.e. it covers damage partly for damage caused by your car to another person's property, and restricted cover for damage to your car cause by theft or fire.

Public liability.
States and Territories now have laws which limit an injured person's common law rights to sue for negligence, place thresholds and caps on damages for pain and suffering, and limit the payouts for economic losses.

Travel.
Make sure the policy and the underwriter will be recognised in the countries in which you travel, otherwise you may face difficulties in receiving medical assistance.

Life insurance.
This is a contract where the insurance company is bound to pay an agreed sum on the death of the person who is insured.

Income protection.
With this type of insurance the insurer agrees to pay you a specified amount of money, usually in monthly payments, in the event that you become disabled and unable to work.

Trauma insurance
This provides a lump sum on diagnosis of one of a number medical traumas such as a heart attack, stroke and cancer.

Some life insurance policies are more in the nature of an investment product, where the company takes your premiums and invests them to add value to the policy.

Using a broker

Under the law an insurance broker must be licensed and registered by the Australian Securities Insurance Commission. This establishes standards that ensure:

* their professional identity is truthful;

* they do not try to pressure you into a policy you don't want;

* they follow certain accounting practices that protect your premiums;

* disputes will be handled in an appropriate manner.

Types of cover

Make sure you understand the types of cover that you will receive from the policy. For instance, home insurance can either be:

* defined event i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire;

* accidental loss or damage i.e. all accidental loss with some exclusions.

Just because a defined event is covered in your policy is not a guarantee that you will be covered no matter how (or why) the event took place.

This partly depends on the way the events are described in the policy, and any exclusions that are made in the policy regarding the circumstances of the event.

Therefore it is always important to carefully read the policy.

Accidental loss or damage policies cover all accidental losses, but it will nevertheless be subject to stated exclusions.

Published: Sunday, 1st Aug 2021
Author: Paige Estritori

Life Insurance Articles

Comparing Income Protection Policies: What Australians Should Look For

Income protection insurance serves as a financial safety net for countless Australians, offering a replacement income when unforeseen circumstances such as illness or injury impede their ability to earn. For the self-employed and entrepreneurs who may not have the safety nets offered by corporate employment, such protection is particularly important. - read more

Breaking Down Common Income Protection Insurance Terms

Income protection insurance is designed to provide financial support if you're unable to work due to illness or injury. It aims to replace a portion of your income during such times, ensuring you can maintain your lifestyle and meet financial obligations. - read more

Understanding the Process: A Beginner's Guide to Income Insurance Claims

Income insurance, an often-overlooked component of financial security, is gaining traction among Australia's burgeoning self-employed population. In an economy where traditional employment is no longer the sole path to success, this form of insurance has become a cornerstone for proactive financial planning. Touted as a safety net, it ensures that personal livelihoods and business operations remain secure in the face of adversity. - read more

Common Pitfalls in Income Insurance Claims and How to Avoid Them

Income insurance is a critical component of financial planning, offering a safety net when life's uncertainties impact your income stream. It ensures that you can continue meeting your financial obligations even if you're unable to work due to illness or injury. This peace of mind is invaluable, especially in an unpredictable job market. - read more

Income Protection Insurance vs. Total Permanent Disability: What’s the Difference?

When life throws unexpected challenges your way, being financially prepared can make all the difference. This is where Income Protection Insurance and Total Permanent Disability (TPD) Insurance come into play. These two types of insurance provide a crucial safety net, ensuring that you and your family remain financially stable even when you're unable to work due to illness or injury. - read more

Insurance News