Types of insurance
The main types of insurance, and the words that go with them.
Insurance is a way of protecting yourself against expensive bad luck. You pay a small, regular amount, and if something goes wrong the insurer covers a much larger cost. Some insurance is a legal must, some is a sensible choice, and the words premium, excess, claim and policy turn up every time.
How insurance works
Insurance is a deal against bad luck. You pay a regular amount, called the premium, and in return the insurer promises to pay out if something specific goes wrong, like an accident, a theft or an illness. Most of the time you claim nothing, but when disaster strikes, the insurer covers a cost you could not easily meet yourself.
It works because lots of people each pay a little, and the money is there for the few who need it. That is why the small regular cost is worth it for the big rare risk.
The words that come up every time
Four words appear across every type of insurance. The premium is what you pay for the cover. The excess is the part of any claim you pay yourself before the insurer pays the rest. A claim is a request for the insurer to pay out. The policy is the agreement that sets out exactly what is and is not covered.
A higher excess usually means a lower premium, because you are agreeing to cover more of any claim yourself.
The main types
The types worth knowing are car insurance, buildings and contents insurance for a home, life insurance, critical illness cover, and travel insurance.
Car insurance comes in three levels. Third party is the legal minimum for driving on UK roads and covers damage you cause to others. Third party, fire and theft adds cover if your car is stolen or catches fire. Comprehensive covers your own car as well, so it is the fullest and usually the most expensive.
Must-have and nice-to-have
Some insurance is required by law: if you drive, you must at least have third party car insurance. Most other cover is a personal choice that depends on your situation and how much risk you are willing to carry.
For example, a tenant would normally consider contents insurance, to cover their belongings, but not buildings insurance, because the landlord is usually responsible for insuring the building itself. The cover you choose reflects your attitude to risk: some people insure against almost everything, others accept more risk to keep premiums down.
Why premiums differ
Premiums depend on how likely a claim is and how much it would cost. A young or new driver usually pays more for car insurance, because the figures show they are more likely to have an accident. Anything that raises the risk, or the cost of putting it right, tends to raise the premium.
- 'Insurance is a waste of money if you never claim.' The point is protection against a cost too big to handle. Paying small premiums and never claiming is the good outcome; the cover is there for the year something does go wrong.
- 'Third party insurance covers my own car.' It does not. Third party covers damage to others; you need comprehensive cover for your own car.
- 'A tenant needs buildings insurance.' Usually not. The landlord insures the building; a tenant insures their own contents.
Key terms
- Premium
- The amount you pay for insurance cover.
- Excess
- The part of a claim you pay yourself before the insurer pays the rest.
- Claim
- A request for the insurer to pay out.
- Policy
- The agreement that sets out what is and is not covered.
Not examined
Check your understanding
- What is the difference between the premium and the excess?
- What is the legal minimum car insurance for driving on UK roads?
- Why might a tenant choose contents insurance but not buildings insurance?
Show suggested answers
- The premium is what you pay for the cover; the excess is the part of a claim you pay yourself before the insurer pays the rest.
- Third party insurance.
- The landlord is normally responsible for insuring the building, so the tenant only needs to cover their own belongings.