A Complete Guide to Insurance
Insurance is a really important part of our overall financial health. But which do you choose, when do you choose it and most importantly, why?
You’ll be used to sorting out travel insurance for your holidays and perhaps even car and home insurance. What about when it comes to the bigger, seemingly more adult, abstract insurances like life insurance, income protection and critical illness? We’re here to break down all things insurance.
What is insurance?
Insurance is about being able to pay for something out of your control that might throw your finances, or those of your dependents (i.e. partner or kids) into disarray. It’s essentially another company agreeing to compensate any losses that you’ve incurred.
In some cases, there’s a legal obligation to have insurance. For example, in the UK if you drive a car, the law stipulates that you must have car insurance. Some mortgages enforce the purchasing of buildings insurance as part of their contract. Other insurances like life, critical illness, wedding and travel are totally up to you and come with varying benefits.
Insurance jargon buster
Before we get into the whys and what fors, it’s worth taking a look at some of the key terms that crop up regularly when looking at insurance.
Premium
This is how much you pay to buy the insurance. There are lots of factors that influence how much the insurance will cost and this will also determine if you pay a one off fee, monthly or even yearly.
Excess
This is how much you will have to pay, alongside the insurer, to make the claim. Usually the higher the excess, the lower the premiums will be and vice versa. If you’re looking to reduce your monthly premiums therefore, you can investigate a higher excess, but make sure that you have that lump sum ready to pay should it be needed.
Policy
When you buy insurance, it’s almost exclusively called an insurance policy. The company will usually provide a unique policy number and a whole host of documents associated with the policy that you should keep hold of incase you ever need to claim.
Policyholder
This is the person, or group of people, who have bought the insurance, are named on the policy and are ultimately in charge of said insurance.
Beneficiary
This is the named recipient of any large payout, particularly important when we’re talking about life insurance. If the policy holder dies, then the beneficiary is the individual who will receive the financial pay out.
Coverage
All insurance policies have activities and clauses that they’re willing to pay for and those that they’re not. What is included in an insurance policy is known as coverage.
Term
Most insurance policies will have a set period of time during which they will be active. This is known as the term, and will be set out upon purchasing the insurance.
Insurance can help prepare your finances for the worst, sometimes unthinkable, situations in life.
When do I need insurance?
Okay, so if you’re just starting out in your career, have few dependents and little room in the budget for insurance, then you probably don’t need to stress too much yet about insurance - apart from the obvious, like travel insurance, or the legally obligated, like car insurance.
If you’re starting to earn a decent amount, crucially with outgoings such as rent, car payments or mortgages that you would struggle to cover if you lost your job, the need for more stable and ongoing insurance is creeping in. If there’s already a partner, perhaps depending on your income, and children on the scene, you should almost definitely have certain insurance policies to make sure that they’d not be left up the creek with a broken paddle, should the unthinkable happen.
Let’s leap in.
What types of insurance are there?
There are a fair few different types of insurance, all with different purposes. We’re taking a look at some of the key types of insurance it’s worth considering when taking your financial health into account, but bear in mind that this list isn’t exhaustive and you can find other types of insurance too.
Life insurance
Life insurance pays out a lump sum of money on your death to your beneficiaries. In other words, those who depend on you, such as children or partners.
There are multiple types of life insurance; some with a flat lump sum offered throughout the duration, whilst some decrease or even increase the eventual amount. Some include investment aspects, whilst some are simply a payout.
There are varying pros and cons for each one and the right one for you will depend upon your budget, health and provision needs. If one partner is totally reliant on the other's income, for example, it’s likely that they will need a different level of insurance to another couple who earn equally and own their house outright. Have your needs for any life insurance clear in your mind before seeking advice and deciding which is most appropriate as there can be a lot of variation.
Critical illness insurance
Critical illness cover can be added on to life insurance, to cover the circumstances surrounding a terminal illness. The lump sum from the life insurance essentially comes early, prior to death, to allow you to cover any costs in the last few months.
You must have a specific terminal diagnosis in order to get the cover and it can only be claimed once. It will often also void the life insurance pay out, which means that your beneficiaries won’t receive another lump sum after your death as it has already been received.
Income protection insurance
Did you know that 1 in 5 of us will suffer from a long term illness that will stop us working at some point in our career? Whilst we’d all like to soldier on, a loss of income could have a huge impact on your livelihood and family.
Some state benefits do exist for these scenarios however they can take a while to come into effect and often don’t come near to the salary you may be used to, which could leave a large gap in household earnings. Income Protection Insurance can be claimed to make sure that your earnings remain relatively even should you suffer from a long term illness or accident. Which specific illnesses, accidents and how long the coverage lasts for is outlined when you purchase the insurance.
You can usually claim it more than once whilst paying in over your working life and there will be certain clauses for the duration, amount of time before receipt and % of your salary that is offered. Often, the more comprehensive the coverage, the more expensive the income protection will be. For example, the multiple payout option for a longer list of illnesses will be more expensive than a basic, lower paying, coverage. Which you opt for will depend upon financial buffers that you have in place, and the potential impact of losing income at certain levels. If it would mean that you’d have to sell your family home for example, you might want to opt for a higher level of protection.
Health and dental insurance
This is not needed in the UK in the same way it’s demanded in the US for example, as we’re lucky enough to have free healthcare access with the NHS. Nonetheless, if you’ve got a family history of a specific illness or prefer to have the peace of mind that private healthcare may well be quicker for you, then it might be an option worth considering. As with all insurance, health cover can come at varying levels and will gradually become more expensive the more that you wish to have included.
Travel insurance
This is a must if you’re travelling abroad. Not just for the suitcases going missing but also in the unfortunate situation that you’re taken ill whilst abroad or are involved in an accident. There are different levels of cover with travel insurance and some of the lightest levels are now incredibly cheap. If you’re also going to be enjoying some extreme sports, like skiing, sailing or kitesurfing, you’ll need to get extra cover, as will over 65s and those with pre-existing health conditions.
Where to look for insurance
If you’ve realised you might be in need of some of these insurances, a good place to start is basic comparison websites to get some quotes. It’s likely you’ll be a little swamped by the vast array of choices, so it can help to determine your maximum premiums and maximum excess that you’d be willing to pay, to help sift through some of the options. When looking more closely at the various details of each policy, make sure you read the information provided to ensure there aren’t any nifty clauses that could tie you in for longer than you want, or cost you a lot more in future.
Keep an eye on them once set up, to ensure they’re still valid for your situation and if there are any major changes in your life. It may feel like a drain on the budget, but insurance exists to provide reassurance in the most unimaginable circumstances, which you might well thank yourself for at some point.
The bottom line
Insurance can help prepare your finances for the worst, sometimes unthinkable, situations in life. They’re not all obligatory, nor in some circumstances, necessary, but you might find that as your financial situation evolves and becomes ever more complex, certain insurances become increasingly important. Checking in on the balance of earning in your relationship, the obligatory outgoings that you currently have and the impact of a change in financial situation can help to establish how important insurance might be. Remember that there are endless variations out there, which can make the whole process more or less expensive, but there is always a compromise to be had.
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