Insurance made clear
Insurance is a way of protecting yourself and your belongings against a particular adverse event, such as a burglary, or losing your income because of illness.
If this happens, insurance will pay out an agreed amount, or an amount to cover the damage, as appropriate. Of course, it may not happen, but you have to decide whether you're willing or able to take that risk. If it does happen, you may have enough savings to be able to manage, but in case you don’t, insurance may help. Some insurance, like motor insurance, is compulsory – you have to have it if you own or use a motor vehicle.
In this section, we explain how insurance works, the main things you can insure, and things to think about to help you decide whether you need insurance. There are lots of different types of insurance available and it can be confusing. We can't tell you what to buy or where to buy it from, but we can help you think about your needs and ask the right questions. Alternatively, you can get a free copy of our Insurance booklet. You can download or order it online – see 
Free printed guides.
See Jargon made clear for an explanation of some key words and phrases you may come across.
The amount you pay for insurance will be based on the information you give the insurance company (the underwriter) and the type of risk you want to insure. Insurance companies use underwriting criteria (for example where you live, if you smoke or what type of activity you would like to be covered) to help them work out the price (premium) of the insurance.
You might find that some insurance companies may not be able to give you the cover you need. This could be because that particular insurance company doesn't offer insurance for the type of risk you want to insure (for example things like antiques or vintage cars). If you want this type of insurance you might have to go to a company that specialises in this type of insurance cover.
Many types of insurance will have a minimum or maximum age that companies will insure from and to, so always check.
The insurance company agrees to pay out if the event which you're insuring against happens. For example, your travel insurance policy may pay out for loss of luggage. It is important that you give the insurance company the correct information when buying insurance as incorrect information might affect or even invalidate your claim.
You pay either a sum for the whole year (or sometimes longer), called a single premium, or a regular premium, usually monthly, for the policy. You can choose which company's policy to buy yourself or you can go to an insurance broker, who'll help you choose – see Getting help.
There are also some types of insurance which are designed to be long term (such as protection and life insurance). However, many types of insurance last for one year at a time and you can renew your policy when it ends, or go somewhere else for a better deal. But make sure you don't lose out by switching and always check that a new policy covers what you need it for. Always compare what's covered by a policy, not just the price. Some might be cheaper than others, but they may not offer the same level of protection.
Many of us live day to day without thinking about what we would do if the unexpected happened. But how would you or your family cope financially if you were to lose your job or become ill? Use the following checklist to take stock of your current situation and help you identify any areas where you feel you may need some or additional cover.
- Do you need insurance? Use our Budget planner to help you get a clear view of the money you've got coming in against all your outgoings. This will help you work out how you would cope if you had to pay for replacing items that were stolen or damaged, or how you would manage if you lost an income.
- What would happen if you or your partner became seriously ill or disabled? There are insurance products, sometimes known as protection insurance, that pay out in these instances but they usually only pay out a lump sum for a limited time and don't cover all illnesses. Always check the exclusions before you take out a policy. You can find out about some types of protection insurance in Income protection, Critical illness insurance and Payment protection insurance.
- What would happen if you or your partner died suddenly? Could you or your family manage without the income? Life insurance is about providing some financial security for people who depend on you if you died. It's also a good idea to check what your pension plans would pay out if you died. For more information see Life insurance.
- Are you a home owner? If your home was destroyed by a fire or flood you would still have your mortgage to pay. Most mortgage providers insist that you take out Buildings insurance with your mortgage but it's worth checking that the amount covered is enough to rebuild your house.
- What about your belongings? Whether you own your home or are renting, it’s your responsibility to cover your belongings. Contents insurance covers the loss of or damage to the contents of your home – for example, furniture, electrical items such as TVs, computers, radios, and smaller items like cameras, jewellery, briefcases and other items you carry outside of your home. Take time to work out the value of your belongings as it's all too easy to under-insure.
- What about health and dental treatment? If you think you may need health or medical treatment, or want to be seen more quickly than on the NHS, Health insurance may be worth considering.
- Do you own a car? The law insists that you have basic Motor insurance if you own or use a motor vehicle, but you may want to increase your cover, for example to replace a written-off car.
- Do you have pets? Animals can present you with nasty surprises in the way of vet's bills. Pet insurance can pay towards a vet's bills and some will pay for you to advertise if your pet has been lost; or for kennel/cattery fees if you suddenly have to go into hospital.
- Are you going on holiday? Travel insurance can cover you against mishaps while you're abroad, from lost luggage and theft to flight delays as well as medical bills. Make sure you read the policy summary for exclusions – there are bound to be some.
Before you take out any insurance always remember to check the details of the policy so you are sure it covers you for what you need it to.
Most insurance is not compulsory. It's up to you to decide what you may need cover for and you may want to get financial advice to help you do this.
Check what insurance you already have
- Check that it covers you for what you think it should – check the exclusions in the policy summary and make sure you've included any important information.
- Check the level of what is covered and tell the insurance company if your circumstances have changed, such as whether you've moved or you want to increase (or decrease) your cover.
- Check whether it covers you for more than you bought it for – contents insurance may cover you for losing credit cards while away from home or legal expenses cover may pay towards certain home-related legal disputes.
Things to think about before you buy
- Once you've decided that you want to buy insurance, get a few quotes from different companies. Make sure you compare like with like and don't buy on price alone – check what it covers and what's left out (the exclusions). If using comparison websites, bear in mind that none of these cover the entire market, and some larger insurers are not represented on any of the websites. Also, some websites may ask you fewer questions in order to speed up the process and instead will make a number of assumptions about you, so you must make sure that you check these are correct and update them where necessary – see Shopping around.
- Use the key policy information that companies will send you to shop around and compare policies' features and costs as well as the service you get from the insurance broker – see Getting help.
- Get financial advice if necessary. You can usually find mortgage, insurance or investment advisers on your high street, or your family or friends might recommend one. There are also a number of organisations that can give you a shortlist of financial advisers in your area – see Related links.
Some questions you can ask
- What will the policy cover me for?
- What won't it cover?
- What else do I need to know about this policy given my particular circumstances?
- Do I need to buy this insurance or am I already covered by an existing policy?
- Is there another insurance product that I should consider which better suits my needs?
- Could I get more or better coverage and will it cost me more?
Firms selling insurance
Firms selling insurance and those providing insurance cover (underwriting the risk) have to be regulated by the Financial Services Authority (FSA), the UK's financial services regulator, or be the agent of a regulated firm. Regulated firms and their agents are put on the FSA Register and have to meet certain standards. Always make sure that the firm you use is on the FSA Register before handing over your money. If they aren't regulated by the FSA, you won't have access to complaints and compensation procedures if things go wrong. To find out if a firm is on the FSA Register, see Check the FSA Register.
The FSA regulates sales of most insurance products. However, its selling rules don’t currently cover the sale of extended warranties on non-motor goods (such as on electrical goods) where the person selling the insurance is also providing the goods.
Even where its rules don't cover the sale of a policy, they do cover the insurance company providing the policy, providing they are based in the UK and regulated by it – if so you will still receive a summary of the policy – see Getting help.
Insurance differs in what it covers and what it doesn't (the exclusions). Read the key policy information that the insurance company will give you to find out exactly what you're getting and use it to shop around and compare other policies – see Getting help.
Whatever type of insurance you decide to take out, always:
- ensure the firm is authorised by the FSA to sell insurance – see Check the FSA Register;
- disclose the full facts when applying for insurance – if you don't, you could invalidate your policy and the insurance company will not pay out in the event of a claim;
- read the key policy information for exclusions – to ensure that you choose the right policy for you;
- check for excess charges – some policies make you pay a certain ‘excess’ amount before they pay out on claims, and some policies charge an excess per clause rather than one overall; and
- shop around using the key policy documents to ensure you get the best deal for you. Some policies might be cheaper than others, but they may not offer the same level of protection.
What are the full facts?
‘Material’ facts are facts that you ought reasonably to know are relevant to the insurer’s decision whether to offer you insurance cover and at what price, so they must be disclosed. This information will form the basis of a contract between you and the insurer.
If you are asked a specific question, you must respond honestly, and it is no defence to say that you didn’t realise that the fact was material. If you don’t disclose material facts, your policy may be invalidated and you won’t be able to make a claim.
So make sure you disclose everything, however irrelevant it may seem at the time, for example any unspent convictions (however small) should be declared. And if you are buying home insurance, you need to declare any (unspent) convictions of anyone in the household too. See Related links for more information on what you should tell them.
Check with your insurer if and when you need to tell them of changes in circumstances.
You have the right to change your mind and have your money back within a certain period (usually 30 days for life, income protection or critical illness insurance, and 14 days for other general insurance products) after arranging any insurance contract.
