What is insurance and how does it work?

Every day, unexpected things happen. It could be a car crash, a burglary or even a natural disaster. 

Being financially prepared for these types of events can mean you’re better placed to recover from them without having to dip into savings or go into debt, reducing financial stress.  

Enter insurance. Insurance is available in many different forms, for many different things. Your health, your travels, your business, and of course, your car and home. Insurance is designed to help you financially protect the things you may not be able to afford to go without, or that might be too costly to fix or replace with money from your savings. 

Getting insurance means you exchange a monthly or annual fee (a premium) for financial protection under certain circumstances (known as listed or covered events).  

For example, if you buy a car insurance policy that covers you for theft or collision, you’ll be covered if someone steals your car or crashes into it.

Insurance generally doesn’t cover you for the type of damage that takes place over a long period of time. This is usually referred to as wear and tear, and can include things like:

• fading and cracks that appear in your home or on your car caused by being in direct sunlight
• worn out carpet in your home in areas that get a lot of foot traffic
• loose grouting or tiles 
• a worn-out car battery.

For more on wear and tear inside the home and how it impacts insurance, see: Every home needs a Health Check. You can also find some handy maintenance tips on ways to help reduce the impact of wear and tear.

If an unexpected event happens — say a burglary, a car crash or a natural disaster — and that event is covered by your policy, you can make a claim to your insurer. If you’re not sure whether you’re covered, you can still make a claim, and your insurer can help you understand your level of cover. 

To make a claim, you may be asked to provide: 

• your policy number
• a description of what happened and how you think it happened
• details such as when and where it happened and who was involved and
• any extra evidence such as photos of the damage or witness reports.

These details are requested to help insurers establish proof of ownership and work out what is being claimed. If you don’t have all the details, you can still get a start on your claim and add more details later. You can usually make, track and manage your claim online or over the phone. 

Once your insurer has your claim, they’ll try to work out: 

• who caused the loss or damage (the person ‘at fault’ may need to pay the excess)
• what caused the damage (to make sure you’re covered under your policy) and
• how much damage there is (this will help determine timelines for any repairs).

Your insurer will likely then get in touch with you to talk about things like:

• what needs to be repaired, rebuilt or replaced and who will be performing the repairs
• if you’re covered for things like a hire car or temporary accommodation, and;
• what you need to do next, such as pay an excess or book in with a repairer.

In some circumstances, a cash settlement takes place. This is a monetary reimbursement paid to you in the event your item cannot be replaced, repaired or rebuilt (for example, a like-for-like replacement can’t be found for an item, or your car was deemed a total loss). This can be requested by you or offered by your insurer depending on the circumstances and your policy.