Insurance can feel complicated at times. With so many foreign terms and concepts to get your head around it can be a little overwhelming. Understanding some common insurance-related language and concepts can go a long way to helping you make informed choices.
Here are some common terms and concepts that you need to understand.
Through the course of our lives we accumulate assets by buying products, homes and vehicles. Many people choose to take out an insurance policy to protect them from a potential loss. This loss might occur through theft or damage, or it could be a total loss through an event like a fire or flood. In most cases the policy may also cover injury to other people.
In its most basic sense, insurance is taken out to transfer the risk of loss from you to someone else (the insurer) in exchange for money. Insurance companies understand the likelihood of risks occurring across all the different types of insurances and they price them accordingly.
When you take out an insurance policy you are actually entering into a contract between an insurer and a customer. This contract is governed by the Insurance Contracts Act 1984, which is an Act of Parliament that sets the rules of all insurance policies.
It sounds very formal but the good news is that this protects your rights as a customer. This does, however, place a number of obligations on you to supply proper and correct information to an insurer, which helps them to accurately assess what you are trying to insure.
An insurer calculates the amount you pay for your insurance (called a premium) based on your answers to a series of questions. These questions relate specifically to what you want to insure. Over a period of time insurers have gathered a great deal of information about various risk factors across the different types of insurance, and the price that you are charged changes according to the level of risk.
The duty of disclosure relates to the obligation that you have to provide true and accurate information so that the insurer is able to determine if it can insure you and at what price. Your policy is only based on the information you have provided and it is expected that you provide honest responses. If you have not been honest or have forgotten to advise the insurer of something you should know, it may impact you adversely if you make a claim against that policy.
Remember that you are entering into a legal contract and you do so with the duty of utmost good faith. This means that you and the insurer are promising to be fair and honest in your dealings with each other.
While it can seem long, it is really important that you take the time to review a PDS because it includes the finer details of what your insurance policy covers. It can be particularly useful when comparing policies so you can see if you are comparing like for like. It is also is a great reference if you have to make a claim.
Because it’s a legal document it can feel quite formal and a little intimidating when you read it. Its purpose is to protect both you and the insurer so there are rights and obligations written into it that are important if you have to make a claim. Areas documented in a PDS include:
These terms can be interchangeable, so refer to the document provided to you by the insurer after you purchase your insurance. It outlines important information about the insurance cover you selected and it includes:
Each time you renew a policy you will be issued with a new certificate of insurance. Where a policy automatically rolls over, it is a good idea to review the information and let your insurer know if any of the details have changed — just to make sure you are properly covered.
Your policy renewal document will accompany your certificate of insurance and outlines the insurance you have taken out as well as how much it will cost. It will also list any taxes like stamp duty and GST. If you pay by direct debit it will confirm those details, including which account the payment will come out of, the instalment amount and the date that it will come out of your account.
Sum insured refers to the maximum amount of money that you are insured for in the event that something happens. It’s therefore really important that you carefully review and calculate what this amount should be. This means determining the value of all the assets applicable to the policy. There are series of questions or calculators available on some insurers’ websites that can assist you with this.
Because the sum insured amount relates directly to any payment in the event of a claim, it is critical to review this amount every year. If you think about how many new appliances or gadgets, and even shoes and clothes, you’ve purchased in the past year it is really easy to see how quickly you can become underinsured. The cost of rebuilding your property can also change as building materials increase in price. Most insurers will include an amount for inflation, however, you still should undertake a thorough review of your own.
When people’s possessions are not accurately valued and they need to make a claim, if, for example, their home is destroyed by a fire, they may find themselves in a position where they are unable to rebuild or to replace all of the items in the house. This is referred to as underinsurance because there is a difference in the sum insured amount and the total replacement cost.
On the other side, if you over-insure and need to make a claim, the insurer will not pay you more than what it costs to repair or replace your items and will not refund you for having taken out more insurance than you needed to.
Exclusions refer to circumstances and situations where a claim can’t be made. These are stated in the PDS so that everyone is clear and on the same page.
It is therefore really important when comparing policies to understand what isn’t included. Having a large number of exclusions reduces the risk that the insurer takes on and it may be the reason why some policies are so much cheaper than those that have fewer exclusions and are more expensive.
The premium refers to the amount of money that you pay the insurer to take on your insurance risk. It is calculated based on the information you have provided to the insurer. The premium amount will also show government taxes such as GST and stamp duty and may include a Fire Service Levy where applicable.
When you are taking out your insurance you will often be asked how much excess you would like to pay. This refers to the amount of money you are prepared to pay out of your pocket before your insurer pays your claim.
Generally speaking, if you are prepared to pay a higher excess, you will see a decrease in the amount of premium you need to pay because you are taking on more of the insurance risk yourself.
Some insurance policies will list any limits that apply to your policy. These limits apply to the maximum payable for a particular event or items insured. They are commonly found in contents insurance and include items like jewellery, watches, artwork, handwoven rugs and collections. For health insurance, they include the amount payable on any single visit and the maximum payable in a year. They are also commonly found in travel insurance and refer to items including lost luggage, medical treatments, personal effects, cancellation of flights and legal liability.
In many instances, insurers do offer additional cover to take on the increased value of the risk, which results in higher premiums.
If you are making a claim it means you have suffered an injury or a loss. Most insurers expect you to contact them immediately to notify them and to lodge a claim. At this point they are able to assist you.
Insurers will want to work with you quickly and effectively to repair, replace or make any appropriate payments. The process involves answering a series of questions to help the insurer understand the type of loss that occurred, the extent of any damage and what needs to happen to fix the situation. Sometimes external people will need to assess the damage while in other instances you may just need to provide a copy of a receipt, credit card statement or photograph to establish what an item was and how much it cost. In the event of large scale losses such as bushfires and cyclones, insurers will send claims people to the area to assist with processing your claim.
Your insurance PDS will have a section on claims that will help to walk you through the process, so it is always a good place to start.
It is important to remember that an exceptionally high percentage of claims are paid. Being helpful, reporting accurately, and providing factual and detailed information will help speed up the process.
Understanding what these common insurance terms mean should help you make a more informed decision when you’re researching or buying insurance. For more detailed explanations of products or types of insurance or risk, it is recommended you contact your insurance broker.
Article Source: https://knowrisk.com.au/insight/articles/insurance-101