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How insurance works

Decide if you need a plan for when things go wrong

Page reading time: 4 minutes

Insurance is a plan for when things go wrong. If something happens that your insurance covers, it helps you pay for the cost of repairing or replacing the insured item.

Insurance can be tricky for everyone, so read on to learn more about how it works.

What is insurance?

Insurance is a plan that can be used if something happens to an item that’s important to you. General insurance includes cover for physical things like your house, car, boat or TV.

Insurance can help to replace or repair something that gets damaged in an accident, or something else outside your control.

Some insurance covers a lot of things that can go wrong, but others only cover a few specific things. All insurance has rules about when you can use your plan. It’s important to check these rules before you decide to take out insurance – to make sure it will cover you for what you need.

You make regular payments (called ‘premiums’) to an insurer to keep your plan in place. If you don’t pay the premium when it’s due, your insurance could be cancelled.

Not all insurance works the same. Find out more about how life insurance and health insurance work.

Insurance words and what they mean

There are some common words used in insurance that you will see often. Some of them include: 

Policy

The agreement between you and the insurance company. This includes the Product Disclosure Statement, and the Policy Schedule or Certificate of Insurance.

Product Disclosure Statement

A guide that summarises the insurance policy, how it works, what is covered and what isn’t, and any limits on the cover.

Premium

The payments you make to keep your insurance, either in one lump sum or in monthly or fortnightly instalments.

Claim

Asking the insurer to pay for something your policy covers.

Asset

The item that’s important to you and you want to protect. For example, your car, your boat, your house (if you own your home), or the things inside your house (the ‘contents’)

Covered event/s

The situation (or usually a range of situations) that are covered by your insurance and you can claim for. For example, if your car is stolen, or a flood ruins your house or the things inside.

Excess

The amount that you have to pay when you make a claim (and the insurer covers the rest). There can be different excess amounts for some situations.

Exclusion

Something the insurance policy does not cover.

Inclusion

Something the insurance policy does cover.

Renewal

When your insurance policy finishes, your insurer will usually contact you to ask if you’d like it to continue.

How to decide if you need insurance

Not everyone needs or should have insurance, so it’s important to weigh up if it’s right for you.

It’s important to ask yourself some questions.

Can I get insurance, and can I afford it?

Insurers can decide not to offer insurance to people, and the cost of your premium will be different based on individual circumstances.

Is it worth getting insurance?

If the item is old, not worth very much, or easily replaced, you may not need it.

Are there other ways I could manage without having insurance?

Would insurance cover me for what I want it for?

How much does insurance cost

The cost of insurance depends on the level of risk that things will go wrong, and how expensive it will be to fix. Insurers will think about:

Other things that may impact the cost and if you can get insurance could be things about your personal situation. This may include if you have:

How to choose insurance

It can be hard to tell if insurance will be useful or not by advertisements and sales talk. Do some research and look around at different options.

For detailed steps see how to choose insurance.

Insurance will only work well for you if it meets your needs – so it’s important to know exactly what the policy will cover and what it won’t.

Using your plan: making a claim

When something goes wrong that is covered by your policy – that’s when it’s time to think about asking your insurer about using your plan – also called ‘making a claim’.

Follow the steps on making an insurance claim.