Insurance

Most of us do not like to think about bad things happening to us, but because there is no way of knowing what the future holds, we often take out insurance to protect ourselves financially if something does go wrong.

Step 1: How insurance works

There are lots of different types of insurance, but they all work in basically the same way:

You pay instalments of money – known as premiums – to an insurance company to protect yourself financially if something happens, for example your car is stolen, your home burns down or you get ill and can’t work

If the worst comes to the worst and whatever it is you have insured against happens, your insurance company pays you an agreed amount of money.

Step 2: Where to buy insurance

You can buy insurance from many different places:

You can use an insurance broker to help you find the right insurance
You can buy insurance policies directly from insurance companies
Banks and other places such as shops and supermarkets sell insurance policies
If you buy a product or service such as a holiday or a new mobile phone, you might be offered insurance cover at the same time.

Most companies selling insurance have to be regulated by the FSA so it’s a good idea to check up before you buy a policy (link opens in a new window).

It is also important to remember that in most cases you do not have to buy insurance, so if someone is recommending that you buy a policy, it is up to you to decide if the policy is right for you.

Step 3: Choosing insurance

Insurance policies tend to fall into two categories:

Protection insurance: examples include life insurance and critical illness insurance, which pay out if you become critically ill or die, and income protection insurance, which helps you if you lose your job.

General insurance: this includes motor insurance, buildings and contents insurance for your home, travel insurance, pet insurance and health cover, which includes things like private medical insurance.

In most cases, it is up to you to choose the types of insurance that you think are right for you but there are a few compulsory insurances. These include motor insurance, which you have to have if you drive a car or motorbike and buildings insurance, which a mortgage lender will insist you have if you take out a mortgage to buy a home. Buildings insurance covers you if your home is destroyed by something like a fire or flood.

Step 4: Pay attention to the details

When buying insurance it is extremely important to read the small print that goes into detail about what your policy covers and any rules and regulations that your insurance provider sets out. If you do not read the detail, you might think you are covered for something that in fact you are not covered for. It is also really important to disclose everything that your insurance provider has asked you to – if you do not, your insurance provider might not pay out when you make a claim.

Step 5: Would you like to know more?

The Money Made Clear website has more information on insurance (link opens in a new window)

Last updated: 27 April 2010