What Is Insurance And How Does It Work?

In this unpredictable world, it can be a huge relief to know that your valuable belongings, and yourself, are protected. Whether it is your new TV, or a car you saved months for, insurance is a way to make the possible risks less destructive to your lifestyle. However, when we picture insurance in our mind, it can sometimes be different to what it actually is, especially with the more complex parts of insurance policies. 

What Is Insurance And How Does It Work?

The word ‘insurance’ is thrown around a lot in everyday life, especially when we invest larger amounts of money into more valuable items. You have likely heard someone say, “you should get insurance on that”, referring to something expensive. It is mainly understood as a method of financially protecting items. But then there are also different types, like life insurance and health insurance. Understandably, the further details of insurance can be less obvious, which is where we hope to fill the gaps about the right information or how to find it. 

A more accurate description of insurance is: a way of financially protecting yourself in life against potential risks, like natural disasters or accidents, mainly by paying a premium that allows you to claim back money on damaged or lost goods. This money pool that you can claim from is made up of the many insurance premiums that are paid by other buyers, including your own money that you pitch in from your own premium. In the same way, other insurance holders can also claim money from the pool for their own damaged or lost goods, which shows how insurance relies on a lot of people paying their premiums together to help the few people who are actually impacted. 

Basically, when you take out an insurance policy, and pay your insurance premium, you are paying for the insurance company’s promise to reimburse you in the case of loss or damage to your insured goods. However, it is important to note that your own insurance policy may be different to other peoples’, and so things that are covered by your policy may not be covered by someone else’s, and vice versa. As such, you should communicate with your insurance company until you truly understand how you would be covered in the case of these accidents occurring. 

Types Of Insurance

As if insurance wasn’t already confusing enough, there are also different types for you to consider between the different parts of your life. While this may seem overwhelming, it can be fairly straightforward to understand if you seek professional advice. Below are some basic descriptions of the available insurance types offered to help protect you and your lifestyle. 

Life Insurance

Life insurance is offered as a way to provide for your family members if you have an unexpected death. This ensures that your family will be financially secure, even if you are not present as an income earner anymore. Depending on your chosen policy, the cost will alter, so you must understand the implications of your own personal policy and the money your family will receive. Many families could face financial hardship with the sudden death of a family member, so life insurance is heavily encouraged for middle-aged citizens whose families depend on their salaries. 

Health Insurance 

Health insurance is generally a way of getting healthcare for an affordable price, which is very important in countries where public healthcare is not as available, such as America. However, in New Zealand, there is a mixture of free and/or subsidised public healthcare services that makes health insurance less critical for the average person. The main role that it plays in New Zealand is as a faster, private way to see a medical specialist because the public healthcare system will see you placed on a waiting list instead. Your insurance company can provide further advice on this matter so that you can make your own informed decision surrounding your health. 

Home Insurance

For many people, a house means stability and security in life. It is no surprise, then, that people want to make sure their homes will be standing and healthy for years to come. Home insurance offers buyers a payout if their house is damaged in a theft, natural disaster, or fire. For example, if you opt for a standard fixed sum insured cover, your company will agree with you on a sum that your house is insured for, which will be the same value paid out to rebuild your home. However, if you choose a total replacement cover policy, if your house is destroyed, your insurer will instead repair and rebuild your house for the total number of square meters that you insured for the home. There are varying costs associated with these different policies, which you should discuss with your insurance company or broker. 

Contents Insurance

Contents insurance is all about insuring the contents of your home, such as household possessions, clothes, furniture etc. As we talked about earlier on this page, you may feel the need to insure personal property like a new TV, or similarly expensive investments. With contents insurance, renters and homeowners can cover their belongings depending on their preferences. Replacement and indemnity policies are the two main covers available, with replacement meaning your items would be repaired or replaced to a new condition, and indemnity refers to your items being put back in the same position as before damage or loss occurred. 

Advantages Of Insurance

So we’ve touched base on what insurance is and how you can use it. But now you’re wondering what the benefits and drawbacks are, right? After all, how can you make the right insurance decisions if you don’t know what they could mean for your financial future? To help you understand some of the many positive sides of insurance, we have listed a few advantages below.

Reduction and Spreading of Risk

As we have talked about already, insurance companies pool together a lot of people’s payments so that the buyers, who are impacted by the risk, can be covered financially. Even if you haven’t felt the impact of the risks in everyday life yet, with insurance, you can rest easy knowing that you will be covered if you are ever the unlucky one. You cannot eliminate the risks from your life, but insurance helps minimise or reduce those risks and their impacts. 

Financial Security 

Insurance is most certainly a way of reducing the impact of the risks we face in everyday life. But beyond that, it ensures your financial position is secure, even if facing a crippling accident or situation. Whether a family member loses their life, your business experiences a severe accident, or you lose expensive valuables, insurance can assist you financially so that a lack of funds does not hugely disrupt your lifestyle. 

Investor Confidence Increases

Investors already face a lot of risk and volatility in prices and the value of items, and knowing that they are covered by insurance can help them become more confident to invest further. For those people that are not fond of the risks in investing, insurance can be a game-changer for investment confidence in other areas of their life, such as KiwiSaver!

What to look out for?

Like anything else in life, with all the benefits and advantages waiting for you, there will always be some disadvantages wrapped into the insurance equation. Even though there might not be many, it is essential to know what they could be. To help you with this, we have listed some possible disadvantages you might encounter on your insurance journey. 

Legal Exceptions and Conditions

Is insurance a great way of financially protecting yourself against the risks in life? Yes, but unfortunately, it is not always that simple. Even with the large money pool that insurance companies collect, they would obviously not be able to reimburse or cover every buyer who is impacted by damage or loss at once. You may find that insurance companies are comprehensive in their investigations before you can receive your claims because they want to ensure they aren’t financially covering an illegitimate insurance claim. This can be an exhausting or frustrating process. 

Insurance Premium Changes

Your insurance premium is the amount you pay to the insurance company to stay covered financially. Depending on which company you pay, your premiums could likely change based on factors like age and medical history. Some companies may give the option to set a fixed premium price for you at the beginning of your agreement, so you should communicate your wishes to the appropriate people. A changing premium might mean insurance becomes unaffordable or unreasonable as an option in your life. 

All Policies May Not cover you

Being covered in all aspects of your life by insurance sounds ideal, but it is not realistic. Specific insurance policies will be specifically offered to certain people, with it usually depending on how likely the risks are for the person in question. This could mean that you will be charged more steeply if you choose a policy not intended for you, so it is essential to seek information and advice from professionals in your insurance company before making important decisions. 

What Do Kiwis Think of Insurance?

If you are on the fence about whether insurance would positively affect your life, it may help to know what your fellow New Zealanders generally think about it. According to a Stuff article from 2018, a TradeMe survey found that 88% of the 1000 Kiwi respondents had vehicle insurance, 74% had home and contents insurance, 50% had life insurance, and 41% had health insurance. These figures could have likely changed since, but they serve as a general idea of how Kiwis feel towards insurance as a whole. 

           Vehicle Insurance Home and Contents Insurance

      Life Insurance     Health Insurance

However, even with this survey information, we highly recommend that you make decisions based on your own circumstances as a priority over comparing with others. There is a lot of variety in New Zealanders’ financial wellbeings, so it may not be wise to make choices for yourself based on other people’s decisions. For more information about policies that suit your needs, contact your insurance adviser for professional advice and expertise. 

To Summarise

In summary, for many people, insurance represents financial security against the many risks of everyday life and is considered a necessity. But as we talked about, many people also knowingly (or unknowingly) choose not to be covered by an insurance company. 

In any case, insurance reduces the impact that everyday risks could have on you, whether it covers your vehicle, your life, your home, your belongings or anything else that is relevant. In the end, it is up to you whether you insure yourself through the payment of insurance premiums, and we suggest seeking further advice and information from your chosen insurance company to assist in your decision-making process.