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Insurance is one of those financial products that everyone has heard of, but perhaps not everyone fully understands. How do you know if you need insurance? Which types of insurance are a necessity, which are optional and which aren’t really needed at all?
In this “All you need to know” guide, we explain the basics of insurance. At a time when lots of us are looking at ways to cut back on our spending, this guide will also help you decide what you can and can’t do without.
We’ve included some handy tools for working out the cost of any insurance you may be interested in so that you can make an informed decision. Don’t forget, it’s really important to shop around, ask questions and make sure you’re getting the right insurance for you – at the best price.
One of the key things to remember about any type of insurance is to always – always – read the small print! Most insurance policies, if not all, come with provisos and conditions that may come as a shock if you need to make a claim. So make sure that you know what you’re signing up for before you commit.
Insurance is a type of financial protection. It is a legal agreement between the insurer (the company who provides the insurance) and the insured (you).
Terms that you will read or hear include insurance cover or coverage, insurance policy, underwriter, premium and excess.
This means the amount of risk that is covered by your insurance policy. Think of it as a lump sum. So, for example, if you were to have a car accident, the level of risk sets the amount the insurance company will pay out to cover the cost of a new car (plus any extras like legal fees, but we’ll get into that later). Or if you have a mortgage, your buildings insurance cover will be the amount it would cost to rebuild your house.
This is the document that lays out all of the terms of your insurance cover. This is where you will find details of what the insurer has agreed to cover, what you have declared in terms of liabilities (eg the age of your car or the type of your property) and it is also where you will find the small print – and what is not covered by your insurance policy. We’ve said it once but we’ll say it again, read the small print. Make sure you know what your insurance does or does not cover!
The underwriter is the person who assesses the level of risk in each insurance policy on behalf of the insurance company. They do not offer cover themselves but they are experts in working out how much of a risk the insurance company is taking on in agreeing to insure you or your possessions.
They do this by reviewing the information you provide on your application form to see if it’s possible – and sensible – for the insurance company to offer you a policy. They then set the premium based on their assessment.
An insurance premium is very simply the amount that your insurance policy costs. Usually this is paid monthly, so you’ll hear or read ‘monthly premium’. The monthly premium is the amount you pay every month for your insurance cover. If you stop paying, you are no longer covered.
In the simplest terms, this is a pre-agreed amount you have to pay towards a claim. This means that should you need to make a claim for damage on your car, for example, and the total amount you are awarded is £500 but you agreed an excess of £100, you will only get £400 from the insurance company. Always check what the excess is on any insurance policy before committing.
Now we’ve explained the basics, let’s move on to different types of everyday insurance.
Do I need it? It may sound obvious to say you only need vehicle insurance if you own or drive a car, van or caravan (anything with wheels and motor!), but it is actually a legal requirement. You are breaking the law if you drive without being insured.
Not only that if you own the vehicle, you must have insurance even if you don’t drive it. Even if, for example, your caravan is parked on your driveway or your car sits in your garage, you must have insurance.
The only times you don’t need motor insurance are when you have a valid Statutory Off Road Notification (SORN), your vehicle has been off the road since before 1/2/98 or your vehicle has been stolen or scrapped and you have informed the DVLA.
When you start exploring different types of vehicle insurance, you’ll find you will be asked to choose whether or not to include things like legal protection (if it isn’t already included). This may come down to affordability, but it is worth thinking about. If you were to be involved in an accident that wasn’t your fault, for example, legal protection can cover your legal fees up to an agreed amount.
To get a quote for different types of vehicle insurance, click here:
Do I need it? Unlike vehicle insurance, breakdown insurance or breakdown cover as it’s more commonly known, is not a legal requirement. However, many people do take out breakdown policies for peace of mind, and lots are included in vehicle insurance, so do check before buying.
No one likes to imagine the worst, but if you break down in the middle of the night, in the middle of nowhere you will be relieved to know you have the means to get home. Of course, there are providers out there who will come and get you and your car, but often for astronomical prices.
Find out more here: Breakdown
Do I need it? If you have a mortgage, buildings insurance is usually a part of your agreement with the mortgage provider. Buildings insurance covers the cost of rebuilding your home should disaster strike, therefore the mortgage provider is also making sure their loan (your mortgage) is also covered.
Even if you don’t have a mortgage it’s a good idea to consider taking out this type of insurance. If your roof were to start leaking, buildings insurance should help towards to cost of repairs. Otherwise you’d be faced with a hefty bill that you might not be able to afford. This is one insurance where it is vital to take the time to read the small print and the conditions around making a claim. There will be exceptions that might catch you out.
Content insurance is slightly different. It covers your possessions. So that means everything other than the bricks and mortar. This is another peace of mind type of insurance and should be viewed as high priority regardless of whether or not you own your home.
Even if you are renting you should make sure that your belongings are insured against fire, theft and damage. Think about it this way – the cost of a monthly premium versus the cost of replacing all of your carpets, for example, should there be a flood or a leak.
Click here to find out more: Home
Do I need it? It isn’t a legal requirement, but it is highly recommended that you view travel insurance as an essential part of your plans and costs.
Whatever you might think of the NHS, many of us forget how lucky we are to have a free at source national health service. We feel ill we phone the GP, we have an accident we go to A&E, in worst case scenarios we are taken by ambulance to hospital. This is not the case when you are on holiday.
Other countries do have free or universal healthcare but that will be for their own citizens. If you fall ill on holiday you will most likely be liable to pay for treatment. That could be for anything from a bandage to an operation. Obviously the more serious the condition, the more serious the cost.
Taking out travel insurance gives you the assurance that you can go on holiday without the worry of what will happen if something goes wrong. Think carefully about the type of insurance you might need as it could be that it isn’t enough to have insurance to pay for treatment, you may need to get home too. So don’t just compare policies based on cost, think about what they offer too.
Lastly, do remember to check things like your bank account for extra benefits. Some banks offer a decent level of travel insurance as a perk.
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Do I need it? You are not required to take out life insurance unless your mortgage provider stipulates it as a condition of lending you the money to buy your home.
For most people this is one of the insurance policies that they think they probably should have but don’t really know where to start, so don’t get round to it. If you have dependents – that means people that rely on you for an income or a roof over their head – it’s a good idea to find out more about what types of life insurance you can get should you pass away or get ill.
You may also want to consider critical illness cover. This does what it says on the tin – it usually involves a one off payment and means you will be supported financially should you be diagnosed with a condition listed in your policy.
The payment could cover things like paying for treatment, covering your mortgage or rent or reimburse you for changes to your home such as a wheelchair ramp. This type of cover is particularly useful for people who don’t have enough savings to fall back on should they fall ill. Make sure you aren’t covered for this as part of your employment package before paying out.
Do I need it? Well, it depends. This really is down to personal preference, what kind of pet you have and whether you are prepared to fork out if your pet gets ill or is involved in an accident.
A good starting point is to think about whether you can afford an unexpected vet’s bill. If you don’t have the cash for a large one off payment, then it is sensible to take out insurance as a monthly premium is far more affordable. Veterinary costs can go into the hundreds, sometimes thousands of pounds.
Again, this comes down to the same thing – peace of mind. If you have a dog or a cat then it really is worth considering. You can also get insurance for small mammals such as rabbits or hamsters but they tend to have shorter lifespans so it might not be worth it. However, a cat can live for 20 years and dogs for over 10-12 years. It is perhaps especially worth thinking about for when your pet gets older and needs more care.
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In our section dedicated to insurance, you’ll find all sort of really helpful articles about the insurance mentioned above and lots that you perhaps had never thought about.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.