At its most basic, insurance is an agreement between you and the insurer that it will pay a certain amount to cover a specific event (e.g. accident, theft, illness or death) in exchange for a premium that you pay.
There are two types of insurance: long-term and short-term insurance.
Long-term insurance
Long-term insurance sees the insurer agreeing to pay you or your beneficiaries (chosen by you) an agreed sum of money in the event that you pass away, contract a terminal illness or become disabled.
An example of this is funeral insurance. Similar to life insurance, it pays out in the event of death, but it generally covers a smaller amount that is mainly used for burial-related costs.
Short-term insurance
Short-term insurance is where your insurer agrees to cover your valuables in case of damages. Examples are car and household insurance (the insurer agrees to pay for damages to your property) and legal insurance (you get access to lawyers and legal proceedings up to a specified amount of cover).
The insurance you require will be determined by your risks (what you need covered) and what you can afford. Comprehensive insurance (insurance that covers everything) is commonly the most expensive.
The cost of your risk profile
Your level of risk refers to the likelihood of something happening to you. If you have bad eating habits, smoke two packets of cigarettes a day, drink a bottle of wine in the evening and have a stressful job, your health is at risk.
If you live in a high-crime neighbourhood, do not have a gear lock, alarm, immobiliser, or tracker fitted to your car and you park in the street, your risk of having your car stolen is very high.
The higher your risk, the higher your premium, but remember, even if your high-risk lifestyle will cost you in premiums, you still need to honestly disclose everything to your insurer. Failure to do so may result in your claim being rejected.
Read the fine print
It is very important that when you buy any insurance, that you read the terms and conditions and understand them. Speak to the company to get clarity if you need to.
Legislation governing insurance protects you and you have 30 days after buying insurance to cancel if you are not happy with the product. Understanding the product will help you make the best use of it.
Insurance is a complex subject. Products are constantly changing and evolving to keep up with our lifestyles and needs. If you find yourself wondering where to turn, look for established institutions that will not disappear overnight, leaving you stranded.