Do I need insurance?Do I need insurance?

How insurance works

If you have expensive or valuable items and assets, sometimes, disaster can strike and those valuables can get stolen, smashed, or otherwise harmed. Paying upfront to restore those things can be pricey (sometimes impossible). 

In the simplest terms, insurance is when you pay a regular sum into a pool with a bunch of other people. The combined pool is held by the insurer, who pays out when one of the insured people needs to replace or repair something.

What are you buying with an insurance policy? 

If you never make a claim, you get nothing but peace of mind. On the other hand, if something does go wrong, and it’s covered in your insurance policy, you’ll get whatever was agreed to in your policy. 

With physical stuff, like your car, phone, or another big-ticket item, your insurer will usually pay for either a new replacement, or the value of the item when it bit the dust, with whatever wear and tear it had at the time. It all depends on your policy.

How do insurers make money?

Everyone pays into the pot, but not everyone makes a claim. Or at least not all at once. In the meantime, the insurer typically uses the pooled funds to earn interest and gain investment returns. Insurers are highly regulated to ensure they treat that cash responsibly and can afford to pay out claims. 

How an insurance policy generally works

An insurance policy sets out the rules that you and the insurer both agree to. You’ll tell the insurer about your habits and circumstances and what you want to insure. In the case of a physical asset, like a vehicle or home, they’ll do some calculations about the value of the asset and what risks they anticipate, and then they’ll propose a regular amount for you to pay to get insured.

The cost of insurance in New Zealand depends on a whole bunch of factors. For example, your car insurance premiums depend on the type of coverage you choose, your car’s make and model, your driving experience and history, and a heap of other factors. 

Aotearoa insurance premiums include standard GST. For house insurance, you’ll also pay an EQC Levy (the EQC levy became Natural Hazards cover as of July 2024, so newer policies will use different terms). For house, contents, or vehicle insurance, you’ll pay a Fire Service Levy . Your insurance provider passes these to the government so that they can go towards providing these protective services at the national level. 

Types of insurance

You might start out with car insurance or health insurance. As you progress through life stages, you’ll often end up with contents, life, and house insurance (which is usually a condition of your mortgage). There’s also travel insurance and business insurance.

Things to consider 

First of all, money! 

Can you afford insurance? 

When money is tight, you might not be thrilled about spending your hard-earned dollars to protect against a hypothetical disaster. It goes without saying that your essentials come first—groceries and rent trump insurance (obviously). 

However, if there’s even a little room in your budget, insurance can often end up saving you money if you zoom out a bit. Let’s explain.

Can you afford not to have insurance?

This is the flipside. Let’s say you decide to skip car insurance. Even if you’re a cautious and thoughtful driver, accidents happen! And while your car might be a bit of a heap, you could still accidentally hit an expensive vehicle and be liable for the damage.

Now let’s say you have vehicle insurance and you’re paying a premium of $250 per year. This can protect you from dipping into your savings or taking on debt for repairs. It may be that your first couple of years of being insured, you barely claim anything—but then in the third or fourth year, you back into a Tesla. Suddenly, those premiums are well worth it!

Even if we assume that a few mishaps and surprise bills are inevitable, insurance (like Sharesies Car Insurance by Cove!) becomes a helpful tool for managing potential future costs, instead of a necessity only in catastrophic events.

Your responsibilities and assets

Personal factors can raise the stakes for you and make insurance more of a necessity. Say, if you’re supporting family members or loved ones with your income or using a vehicle as a crucial part of doing your job. Or maybe you own some valuable physical items as part of your hobby or work. You’re counting on those important assets—whether it’s your possessions, your skills, or your future income. Health, lifestyle, and personal circumstances all play a role in determining what kind of insurance you need.

Make your decision 

Shop around for policies, and get quotes from a few providers or use a comparison tool. 

If you’re renewing, make sure you’re comparing apples with apples; it may look like your current provider is cheaper, but rates tend to change annually. You might find that when your renewal comes up, other offers are actually more competitive. Plus, some insurers will provide more thorough coverage than others.

Seek advice from an insurance broker or financial advisor if you’d like the extra guidance (brokers will typically provide their services for free but they take a cut from the insurer). You can also chat directly to a few potential providers to ask direct questions about your specific situation.

Check in when things change

Your priorities might change down the line as you end up owning more or less stuff, your responsibilities shift, or your family dynamic changes. Check in every now and again to see if your insurance still makes sense for you—it’ll typically be on an annual renewal cycle, so you may want to take the opportunity to do a review once a year.