Finance Questions Explained Simply

Simple explanations with no jargon

What’s Insurance?


is a way of making sure that if something of value to you is lost or broken, you will be able to make a claim to cover the cost of replacing it.

You can get insurance for all sorts of things including cars, boats and planes, houses and mansions, life, health, pet insurance, wedding insurance and even body parts.  Check out this link which is an unofficial top ten of celebrity insurance policies

Imagine that you’ve just left home and moved into an apartment with your best mate and all your worldly belongings.  You have a party and a few friends come round and it all gets a bit out of hand.  Next morning you discover there’s a shopping trolley in your living room and that someone has stood on your laptop, cracked the casing and broken the screen.

Fortunately your dad made you buy contents insurance when you moved in, so now you can make a claim for your broken laptop and buy a new one.



So how does contents insurance work?

Well, you need to estimate how much it would cost to replace all your worldly belongings with new items if your home went on fire and everything burned to a crisp. 

 To get your stuff ‘covered’ by an insurance policy, the insurance company (you might also hear it called the ‘insurance broker’) will get you to fill in a form, or you can of course do it online which is probably a lot easier.  Site comparison sites such as Compare the Market and Money Supermarket for example look at lots of different insurance brokers to find you the best deal.  You will have to input all your details to enable the insurance company to work out the level of risk – that is the likelihood that something will happen that means you will need to make a claim. 

They take into account things like how old you are, what kind of security and locks you have on your place and even where you live as crime rates vary considerably by region.  If you live in an area where the crime rate is high for example and it’s more likely you’ll get burgled, then that will increase how much you have to pay to insure your stuff.

 They work out how much they are going to charge you.  This is called the ‘premium’.  It’s a lot less than the value of your things which you might work out would cost £50,000 to replace.  The insurance company might charge you a premium of say £200 for the year. 

It’s a lot of money out of your pay packet, so the insurance companies let you pay in monthly instalments.  This cuts down the cost and works out at around £17 a month.  I’ll talk about that some more later in a separate post.

So you’ve got a broken laptop and a contents insurance policy.  Normally there will be an ‘excess’ on the policy.  This means that when you ask the insurance company to give you the money to buy a new laptop, they won’t give you every penny you need to buy it – you will have to pay the first £X amount – the excess.   

The ‘policy agreement’, which is the document you get when you take out insurance, will tell you all their rules about what you can and cannot claim for.  It will tell you how much the excess on the policy is. 

So say your new laptop is going to cost £600 and the excess on the policy is £50, the insurance company will send you a cheque for £550.

However, you should note that if your old laptop was only £300 new, you can’t claim £600 to replace it.  The insurance company will only replace the laptop with either the same model or if it isn’t made anymore, one with a similar specification.

 So that’s basically how insurance works.  I’ll go into more detail about some other types of insurance soon.  Please do feel free to comment and leave feedback.


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