In basic terms, insurance is a policy which ensures that you are financially supported for an accident or illness and compensated accordingly. Insurance is designed to keep you protected from any unforeseen circumstances, such as theft, accidental damage or financial shortcomings.

In most cases, insurance cover is completely optional, leaving it up to the individual to decide whether a policy is necessary or not. The cautious few tend to take out more cover whereas risk-takers pay for the bare minimum. Different insurance companies offer different policies for each type of cover, so it's best to shop around before you make a decision on which to take out.

Different types of insurance

• Car - Motor insurance is mandatory by law to be taken out and all drivers must be insured before getting behind the wheel. Car insurance aims to protect drivers from any substantial costs from accidents or injuries. 'Third party' insurance is the most basic policy allowed, and it's the most popular insurance for new or young drivers.
• Travel - When you go on holiday, travel insurance can cover you for anything unfortunate that happens abroad, such as an airline losing your luggage, cancellation or unforeseen illnesses or injuries. Travel insurance will cover your medical expenses (which can cost upwards of £1000!) so it's well worth paying the extra cost when booking your flights and hotel. Most holiday providers will include travel in the booking for a cost as little as £10.
• Contents - Contents insurance covers you for all of the belongings you own. It is designed to protect you from accidental damage to all of the items in your house, such as furniture, electronics and clothing, in the event of a flood or fire. The best way to classify what's insured is by thinking about what you would physically take with you if you moved house.
• Building - Similarly to how content insurance covers damage to the stuffinsideyour house, building insurance covers damage to the building itself, including fittings and fixtures. It's usually possible to buy building and contents insurance as a single package, but it's best to check with the insurance company first.
• Life - Though it's morbid to think about, life insurance ensures that your dependents are financially stable in the event of your demise. Life insurance is unique due to the fact that insurers pay outwhensomething happens, rather thanifsomething happens.
• Medical - Private medical insurance is designed to ensure that you are treated immediately if you fall ill or get injured. Those insured by private medical cover are given priority over those without cover, who would be placed on an NHS waiting list before treated. Most policies only cover you in the event of short-term illness or injury.
• PPI - Payment protection insurance (also known as accident, sickness and unemployment cover) is recommended for those who are taking out a large loan or mortgage, for example. The cover is to protect you in the event that you suddenly are unable to make the payments, either because of redundancy or illness. PPI is usually very expensive.
• Animal - Animal, or pet, insurance is to assist you in paying veterinary bills if your pet gets ill or injured. Medical bills for animals can be quite expensive, so by paying for the insurance you are essentially paying the costs off in small sums, rather than one lump cost.

Understanding the excess charges

No matter what insurance you're currently signed up to, if something goes wrong and you have to make a claim, you will often have to pay for excess. Policies usually have a ton of hidden costs and confusing contractual small-print so it's paramount that you completely understand what you're signing up for before you give the go-ahead. Depending on what type of insurance you're covered by, your excess could cost you from £20 to over £200. By paying a larger excess, in some cases, you can reduce the premium charges you pay regularly.