Insurance

Insurance provides a vital safety net in all areas of life, and it’s important to understand what forms of insurance there are to ensure protection

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It’s impossible to predict what’s going to happen from one day to the next, and no-one is able to see the future. When people work hard all their lives to create a comfortable and stable life for themselves and their families it’s important to have some sort of security put in place, which is why it’s essential to ensure that what’s important to you is properly covered. A good insurance portfolio will guard against the worst “what if?” scenarios, meaning that even if something does go wrong tomorrow, it won’t be the end of the world.

With insurance available in many different forms and for almost every asset imaginable, it’s hard for consumers to pick out exactly which policies they need, and what will best suit them. In this article we’ll cover the most popular forms of insurance and how they help to guard people’s livelihoods, and we’ll also highlight some of the most important areas to gain insurance cover. An insurance policy is a commitment, and with most policies lasting 12 months or more it can be a fairly high financial investment; consumers must be sure to consult a specialist financial advisor before committing to an insurance policy, in order to ensure that this is right for their circumstances.

How Does Insurance Work?

Insurance products are designed to guard against life-altering events in people’s lives, whether this is a serious illness, loss of a car or house or falling victim to a burglary. Rather than face the consequences of such a dramatic change in a person’s circumstances, an insurance policy guarantees the cost of replacement, support and care, should it become necessary. This means that individuals with insurance cover have some protection from the worst of a financial impact when the unpredictable happens, and have a safety net to fall back on.

When an insurance policy is taken out, the customer will begin making payments (known as “premiums”) to their insurer. This money is pooled with that of the insurer’s other customers, and if any of them need to make a claim this money is used to fund it. The amount each customer is charged depends on the odds of them needing to make a claim; from the insurer’s point of view, they need to cover the costs of each claim that’s made, while also ideally making a profit. For example, let’s say a motor insurance policy costs £100 per month to each of an insurer’s 100 customers, totalling £10,000 monthly income to the insurer’s pool. If the insurer expects an average insurance claim to be £10,000, they will need to ensure that on average fewer than 1% of their customers will claim each month - otherwise, they’ll be paying out more than £10,000 per month, and losing money. If there are fewer claims or the claims are for lesser amounts then the insurer can potentially lower their premiums in order to become more competitive.

For consumers, what really matters when taking out an insurance policy is the risk they present to the insurer. Every insurance provider will have an exhaustive database of risk calculations that let them gauge how risky each individual policy will be. This is why car insurance for teenagers is more expensive than for adults, because teenagers are statistically more likely to crash and submit a claim than older, more experienced drivers.

Choosing an Insurance Policy

When deciding which type of insurance is right for you there are several different factors to consider. Though each type of insurance is likely to have widely varying policy types, there are certain aspects in common throughout the insurance sector. Insurance customers should carefully considering the following points when deciding on a policy that suits their needs.

Is the cover necessary?

Firstly, it’s important to decide how crucial the policy is. For home insurance and car insurance there is little choice in the matter; the law requires that you hold an insurance policy of some sort. However it may not be necessary to insure an aging family car for comprehensive cover, as it’s unlikely to be expensive to repair in the event of a collision.

Is the cover sufficient?

When taking out a policy it’s important to ensure that it provides the necessary amount of cover to the policyholder. Car insurance, for example, can come in many different varieties, and while the law only requires that third-party insurance is held, many individuals prefer the added cover of fire and theft cover as well. It’s also crucial that the policy covers the full amount of the asset’s value - otherwise, the policyholder will still have to pay out even more when replacing it.

Is the cover affordable?

Full 360-degree protection on everything we own would be ideal, but the cost of maintaining many different policies for every eventuality is often too much to bear. Generally some compromise has to be struck between comprehensive cover and affordability, so while an all-around insurance package might provide the best cover, it might be prohibitively expensive. Bear in mind the cost of replacement, though, when deciding whether a policy is too expensive or not; while it may cost a lot in the short term, the long-term ramifications of insufficient cover can end up costing a lot more.

Are there any unnecessary extras?

Many insurance policies come with added perks, such as courtesy cars and breakdown coverage for vehicles. This isn’t always needed, though, and sometimes it’s better for a policyholder to eliminate aspects of the policy which are unnecessary for their needs.

Bearing in mind these various criteria, consumers should be able to identify the type of insurance policy which best suits their needs. By sticking to these core questions it’s possible to reduce a complex and confusing policy document - if it meets all these requirements, then the policy is viable. If not, it’s best to look elsewhere for a more suitable insurance product.

Types of Insurance

The insurance market is huge and highly varied, with dozens of providers offering hundreds of variations on every conceivable form of coverage. We’ll cover some of the most common types as well as a few more esoteric flavours of insurance cover, and point out some of the most important aspects of each insurance type.

Vehicle Insurance

The UK roads are amongst the safest in the world. With modern vehicles providing outstanding protection from impacts and road safety becoming a higher and higher priority, the country’s highways and byways are becoming safer than ever before. Accidents do happen, though, and motorists are required by law to have an insurance policy that covers the costs incurred in a crash. The most basic form of cover is third-party only; this is used to pay for the costs of anyone else involved in a crash that is deemed to be the fault of the policyholder. Any damage caused to the policyholder’s vehicle, however, is their own responsibility, so the driver will still be liable for the costs of their own repairs. Third party insurance is a good choice if repairs are likely to be cheap, so older cars and less valuable vehicles are often insured under a third-party only (TPO) policy.

In addition to third-party insurance, drivers can also obtain fire & theft cover. As the name implies, this covers the cost of replacing the vehicle if it is stolen or destroyed through fire, neither of which are covered under a third-party only policy. More extensive cover is available under a comprehensive plan, a form of motor insurance that combines third-party, fire & theft as well as cover for the policyholder’s own vehicle. In the event of a collision, the policyholder won’t have to fork out for repairs to their own vehicle, so owners of high-end vehicles often choose comprehensive cover.

Comprehensive cover is usually more expensive than the other forms of insurance, but not always - drivers should compare the premiums for all types of policy before making a decision. Because TPO insurance is usually cheaper, higher-risk drivers tend to take out these types of policies, which means that insurers have to pay out more often for third-party policies, thereby increasing the overall costs of this form of insurance. In addition to the potentially lower premium cost, the costs of repairing or replacing a vehicle can wipe out any savings made on a cheaper policy, so comprehensive cover should always be a consideration for any driver.

Specialist Vehicle Insurance

Motorbike insurance, van insurance and short-term insurance are all valuable sub-types of vehicle insurance which allow consumers to protect their various assets. Both van and motorbike cover are vital as these different vehicle types require specialised risk assessments. Short-term cover is a way of providing cover when a friend borrows the policyholder’s car for a weekend to move house, or to go on holiday - these policies are usually cheap, and provide a helpful way for people to stay safe.

Home Insurance

The second most widely-held form of insurance throughout the UK is home insurance. Again, as with motor insurance, home insurance is a requirement for homeowners, and though the policies available in this sector may vary they all share similar aspects. There are two components to home insurance; building cover, and content cover.

Building insurance is required by almost all mortgage providers, as they are reliant on the property remaining in saleable condition to recoup their mortgage. Some mortgage providers also offer home insurance and may require borrowers to take out insurance through them; homeowners should check what their lender’s requirements are.

Contents insurance is cover for the internal fixtures and furnishings, and all of the possessions within a home. Homeowners are not required to take out this type of cover but it can be valuable - in the event of a fire, for example, it can be very expensive to replace an entire household’s possessions. For smaller homes it’s often a good idea just to insure some of the most expensive items, such as computers and entertainment systems.

Specialist Home Insurance

Not all insurers will cover every type of home. Specialised homes like self-builds, eco-homes or listed properties often require a specialist insurer who has the expertise to assess the risks of insuring these properties. Consumers with homes that are out of the ordinary should turn to an insurer that deals with properties like theirs in order to obtain a policy that’s tailored to their needs.

Medical Cover and Life Insurance

In the UK we’re lucky enough to have a comprehensive National Health Service that provides a safety net for those who cannot afford private health care. However, there are some services which can be obtained more quickly and reliably from a private healthcare provider, and access to these services is usually quite expensive. When a loved one falls ill, the last thing anyone wants to think about is the cost of treating them, so a secure medical insurance plan is essential, especially later in life. Medical cover is available in many different forms, and can be used to pay for everything from quick prescriptions to private physiotherapy, and serious illnesses can also be covered.

Life insurance is a way for individuals to help protect their families from the financial impact of their deaths by arranging to cover the costs of palliative care, funeral arrangements and treatment. This can make a loved one’s passing much easier to deal with, and prevents financial matters from occupying a grieving family’s time.

Earning Insurance

While health care insurance helps to mitigate the costs of obtaining medical assistance, there are many forms of illness that can hamper an individual’s ability to earn. While most employers provide decent sick pay allowances, these often reduce after a matter of weeks, meaning that any serious illness is likely to have a severe financial as well as physical effect. Earning insurance helps guarantee an individual’s income even in the event that they’re unable to work, and so provides stability for those whose families depend on them to bring home the daily bread.

Business Insurance

UK law requires businesses to hold an insurance policy to ensure they’re able to meet unexpected costs. In addition to securing cover for their premises, businesses will need to have public liability and employee cover to guard against any costs incurred through injury or accident.

Business owners should carefully consider their responsibilities and the cost of rebuilding their premises before committing to a premises insurance policy - it’s essential to obtain a policy that provides full cover for the business. For commercial premises which are rented, the landlord (or freeholder) will be responsible for arranging insurance; this isn’t the case for customer-facing businesses with a shopfront, though, and business owners should consult an advisor to determine what their responsibilities are.

Public liability insurance covers the cost of any accidents that involve the public, while employee liability insurance does the same for the business’s staff. In both cases there is a legal requirement for businesses to have the appropriate level of cover in place, so business owners must also ensure they’re sufficiently guarded against these potential issues.

Student and Landlord Insurance

Landlords, like business owners, need to ensure that their income is covered, and that any responsibilities they have to their tenants are handled. As a property owner they will need to obtain buildings insurance, like any homeowner, but may also need to take out specialised cover that protects their tenants as well. Landlords can also benefit from earnings insurance that guarantees their income during “void periods” when the property stands vacant - vital if the building needs refurbishing.

Student tenants generally require an individual contents insurance policy, and while some may be covered under their parent’s policies this is not always the case. Student neighbourhoods are often a target for burglars attracted by the prospect of easily-robbed student flats filled with laptops, games consoles and TVs, so a strong contents insurance policy is highly valuable before heading off to university.

Pet Insurance

Much like a beloved family member, there is little expense spared when caring for a family pet. Veterinary bills can often rival those of private medical treatment, though, and can be difficult for a family to meet. Pet insurance is a vital way of ensuring that a well-loved cat or dog is taken care of no matter what, and that expensive medical problems don’t bring up tough choices for a family.

The cost of pet insurance often depends on the age and breed of the pet in question; some thoroughbred dogs are particularly vulnerable to certain forms of illness, while a more genetically diverse animal may not be. Older animals are more susceptible to developing issues, so as a pet ages it generally becomes more expensive to insure.

Travel Insurance

Even the best-laid plans of a seasoned traveller can go awry through no fault of their own, and costly re-booking of plane tickets and hotels or foreign medical bills can quickly add up and spoil a holiday. Travel insurance is an essential part of any holiday package as it allows holidaymakers to focus on what really matters; enjoying their time in the sun, and forgetting their daily troubles.

Travel insurance can vary in price depending on the intended destination, and is often available from a travel agency. Different levels of cover are available too, from basic flight cancellation policies to all-round passport replacement and foreign care cover.

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