How does insurance work in Australia?

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Have you come to a point in your life where you aren’t covered under your parent’s insurance anymore?

Young people often think they don’t need insurance and see it as a waste of money. But insurance is something that you don’t think you need, until you find yourself in a situation where you need it most.

Hopefully for the most part you won’t have to claim on your insurance that often. But it’s so handy (and sensible) to have protection if something was to happen (touch wood!). Trust us, you don’t want to pay these costs outright!

What is insurance?

Insurance helps protect belongings and assets that hold a lot of value, or would be difficult or expensive to replace. For example, the contents of your home, your home itself, your car, your jewellery, and even your health.

But you may be wondering, what are we protecting these valuable things from?

We are protecting them from something unexpected or bad that could potentially happen.

Of course, we can’t predict what will happen in our life, so we use insurance as a safety net. This ensures that we aren’t left in financial debt if we were to get in an accident, lose our house in a fire or need an ambulance.

With insurance, we can also choose which risks we want to cover and deem to be the costliest if something were to happen.

How does insurance work?

When you pay your insurance premium, this amount will get added to a pool, alongside everyone else’s premium.

If something unexpected occurs and you make a claim, your insurer will draw from this pool of money to help you pay for repairs, replacements, or restorations.

Note: You may never have to draw on this pool if you’ve never had to make a claim.

What is a premium?

A premium is the amount of money you pay your insurer to get access to insurance. The amount you pay will depend on numerous factors and your level of risk in unexpected situations (AKA how likely it is that you will have to make a claim).

For example, your car insurance premium will be calculated based on factors such as the suburb you live in, your age, previous accidents (if any) and the worth of your car.

You can choose to either pay your premiums monthly or yearly.

Your premium may increase due to factors such as:

  • Your risk increasing
  • Insurer costs increasing
  • Inflation
  • Governmental changes
  • The number of claims they’ve received that year

What is excess?

 Excess is the amount you must pay your insurer when and if you make a claim.

How do you go about getting insurance?

  1. Research thoroughly to find the right insurer for you and your circumstances (there are around 120 insurers in Australia, so research is so important!). You can use online comparison tools like Compare The Market to directly compare policies based on premium costs, excess costs and exclusions.
  2. Figure out what insurance you need, what you need covered and how much you can afford.
  3. Once you’ve chosen your insurance company, it is time to contact them. The first thing you will have to do is give them personal information and answer lots of questions so they can determine your level of risk, as well as how much your premium will be.
  4. After this, you must read the Product Disclosure Statement (PDS). This document will state what is and isn’t covered, waiting periods, how to make a claim and information you’ll need. This is important to check that you’re definitely covered in all the areas you need to be!
  5. You will often be asked to pay your first instalment and confirm the policy (but don’t worry if you aren’t sure, you will have a cooling period of 14 days to change your mind).
  6. Once you’ve confirmed the policy, you’ll be sent a copy of the policy documents for your own records –  make sure you keep them in a safe place so you can refer to them later if needed!
  7. Update your insurer if your situation changes, review your policy and renew if need be.

What are the main types of insurance?

Health insurance

In Australia, we have Medicare, which gives all Australians free access to a wide range of health care services. However, not everything is covered under Medicare, and you may consider taking out private health insurance.

There are three main types of private health insurance:

  • Hospital cover: This covers the cost of staying in hospital
  • General treatment or extras cover: This covers services such as physio, dental and optical
  • Ambulance cover: This covers the cost of taking an ambulance to the emergency department

Note: Private health insurance can sometimes give you access to priority treatment.

Sometimes when you make a claim, you may be hit with an out-of-pocket expense. This is because your insurance may not always cover the full amount required.

There are two government initiatives to encourage people to get private health insurance earlier in life: Lifetime Health Cover loading and Age-based discount.

The Lifetime Health Cover loading initiative encourages those under 31 to get private health insurance. If you choose not to get private health insurance before 31 years of age, you will be charged a 2% medicare levy fee on top of your taxable income each year.

The age-based discount gives insurers the ability to offer a 10% discount to people aged 18-25 years on their private health insurance, until the age of 41. However, this discount will not apply if you’re still listed as a dependent on a family policy.

Life insurance

Life insurance covers you in situations such as death, severe illness or injury.

There are four main types of life insurance:

  • Death/life cover: An amount of money is paid to a nominated person if you pass away to assist them financially
  • Total and permanent disablement cover: If a person is permanently disabled and unable to work, they can receive a payment to cover the cost of rehabilitation and living
  • Trauma cover: This insurance covers you if you’ve been diagnosed with a severe illness
  • Income protection cover: This pays you an income if you can’t work due to injury or illness

Home insurance

Home insurance covers the financial losses that come with repairing or replacing your house when it gets damaged. It will cover the house, fixtures, and any legal costs.

There are two main types of home insurance:

  • Sum-insured cover involves estimating how much it’ll cost if something happens. If you choose this type, you should make sure you calculate an accurate estimate based on when your house was built and the quality of materials.
  • Total replacement cover involves working out how much it would cost to rebuild your home to the same, original standard.

Contents insurance

Contents insurance covers the cost of replacing or repairing your household items and belongings. These can include furniture, jewellery, computer, TV and fridge. You should consider what is most valuable and what you can and can’t afford to lose.

You can join your home insurance with your contents insurance if you have your own home.

Note: If you’re renting, you will only need to get contents insurance (not home insurance).

Car insurance

If your car or someone else’s car need repairs due to an accident, car insurance will cover it.

There are different types of car insurance, including:

  • Compulsory third party insurance: As the name suggests, this insurance is mandatory for all car owners in Australia and is needed to register your car. This insurance covers injuries to others that may be caused by your car in an accident.
  • Third party property insurance: This insurance covers incidents where you cause an accident and as a result, someone else’s car is damaged.
  • Third party property, fire and theft insurance: This covers your car if it’s stolen or damaged.
  • Comprehensive insurance: This will cover you for damage caused by an accident, theft and weather events, as well as if you cause any damage to someone else’s car and property.

As a young driver, your insurance premium will unfortunately be higher than people who have been driving for longer, like your parents. This is because young drivers are more likely to get into accidents and take risks due to their inexperience.

For information on buying your first car, click here!

Travel insurance

Travel insurance is used to cover the costs of something unexpected happening overseas. It can be used for medical means such as accidents or injuries, cancellations and delays, lost or stolen belongings, and car hire.

Before you travel, ensure you know how to make a claim if anything happens as you normally have to register the claim as soon as possible. You will also need evidence to support your claim such as a doctor’s report or proof of purchase.

How do I know what is worth insuring?

You can get talked into purchasing insurance for pretty much everything, and unfortunately some companies take advantage of your fear of losing things and capitalise by selling insurance you don’t need. As a result, the cost of all these insurances start to add up.

So how do you tell the difference between what you have to insure and what you can risk leaving uninsured?

Ultimately, it’s up to personal preference, but you can use the following general advice as a guide.

If you would not be able to afford to repair, replace or re-purchase something outright, it’s worth insuring.

The main types of insurance all adults generally need are:

  • Home insurance (if you own your property)
  • Contents insurance
  • Car insurance – third party insurance is compulsory
  • Ambulance Cover
  • Health insurance (especially people over 30)
  • Insurance for expensive items (particularly if you take them out of the house regularly, or if they’re not covered by your contents insurance) e.g. expensive jewellery, expensive equipment or technology, musical instruments,
  • Travel insurance
  • Life and/or income insurance – important if you have a family or a spouse that is dependant on your income
  • Business insurance – if you own your own business