Skip to content

Fact Sheet 2: How insurance works

This fact sheet is one of a series that looks at the steps you can take to give yourself the best chance of fixing or replacing your property and belongings if they're damaged or destroyed in a natural disaster, such as a bushfire, flood or storm.

See Fact Sheet 18: Glossary for definitions of words and terms that are in bold text.

To find other fact sheets in the series go to www.InsuranceCheckup.tas.gov.au or visit your local Service Tasmania for an info pack.

Tasmania and natural disasters

Tasmania has its fair share of bushfires, floods, storms and other extreme weather events.

Depending on where you live, you may have an increased risk of loss of or damage to your home and/or belongings if a natural disaster comes your way.

People who suffer loss and damage in natural disasters generally receive support from family, friends, charities, and other organisations and people within their communities. The Tasmanian and Australian Governments also provide emergency assistance and grants of money to help with immediate recovery needs. However, these are usually small, one-off payments, while the cost of replacing, repairing and rebuilding all that has been lost can be enormous. Without insurance, you might have to spend many years working to get back on your feet.

Having insurance – the right insurance for you – will help you repair, rebuild, replace and recover.

What is insurance?

Insurance is a product you can buy to protect yourself against the financial risk of something going wrong in one or more areas of your life.

There are many types of insurance, e.g. home insurance, contents insurance, business insurance, life insurance, travel insurance, health insurance, consumer credit insurance and vehicle insurance.

Insurance doesn't stop bad things from happening, but it can help you get back on your feet if something bad does happen.

How does insurance work?

Insurance is a way that we share the financial cost of bad things happening. By paying a smaller amount of money each year we can protect ourselves from occasional enormous costs.

Insurance involves a contract called an insurance policy between you (the policyholder) and an insurance company (the insurer). Under this contract, you and the insurer agree that:

  • you will pay the insurer a certain amount of money (a premium) either once a year or at certain times during the year
  • your insurance will only 'cover' or apply to financial losses and events that are set out in the policy
  • the insurer will pay money (a payout) if one of these events happens and you make a claim on the policy.

Every insurance policy includes a Product Disclosure Statement and a Key Facts Sheet that sets out the important features of the policy.

Here's an example. Say you get insurance for your belongings (contents) in case they are damaged or destroyed during a natural disaster. In that case, your insurance policy will set out:

  • which items you are insuring (e.g. your furniture, your phone, your computer)
  • what risk you are insuring these items 'against' (e.g. the possibility that they are damaged or destroyed in a natural disaster or stolen during a robbery)
  • what is covered (inclusions) and NOT covered (exclusions) under your policy (e.g. loss or damage due to bushfire is usually covered, but loss or damage due to flood is often not covered automatically)
  • what premium you will pay and when you will make payments (e.g. once every year, every three months or monthly)
  • what you and the insurer will do if the event you have agreed on actually happens (e.g. if your home is destroyed by bushfire, or your furniture is ruined in a flood)
  • what you will get from the insurer if they accept your claim (e.g. money to repair or replace the item, or a cash settlement) and whether you will be responsible for some of the cost of your claim (an excess or a deductible).

Resources

For general information, and for calculators and other tools to help you manage your own insurance:

Important notice

This fact sheet gives you basic and general information only. It does not cover every situation or everything you may need to know about insurance. It does not take into account your personal circumstances. Make sure you carefully read Key Facts Sheets and Product Disclosure Statements. Ask your insurer as many questions as you need in order to understand how your insurance policy will work for you. Use other tools available to you and seek professional advice if needed.

Information in these fact sheets has been drawn from a number of publicly available Government and non-Government resources.

This project has been jointly funded by the Commonwealth and Tasmanian Governments under the Disaster Recovery Funding Arrangements.