How insurance works: premiums, excess, cover limits and exclusions

Insurance is a promise with a price attached. You pay a premium, usually monthly or once a year, and in return the insurer agrees to pay for certain losses if they happen: a stolen bike, a flooded kitchen, a cancelled holiday, a serious illness. The promise is written down in a set of documents, and the four things that shape it most are the premium, the excess, the cover limit and the exclusions. Get those four straight and most of what a policy does, and most of what goes wrong with claims, becomes predictable.

The premium is what you pay. The excess is the part of each claim you pay yourself before the insurer pays anything¹. The cover limit is the most the policy will pay out under a given section, and there may be smaller sub-limits inside it². The exclusions are the circumstances the policy deliberately leaves out, and every policy has them³. Around all of this sit rules: what you must tell the insurer when you buy, how claims must be handled, what happens if the insurer gets it wrong, and what protection exists if the insurer itself fails.

What an insurance policy is and what it promises

An insurance policy is a contract. You agree to pay a premium and to answer the insurer's questions honestly; the insurer agrees to pay for the losses the policy covers, up to its limits and outside its exclusions. What that promise looks like depends entirely on the type of insurance. Travel insurance typically covers medical costs, cancellation, baggage and personal belongings, personal liability and delays¹. Contents insurance covers your belongings if they are stolen, lost or damaged¹. Health insurance policies typically cover a wide range of medical services, from consultations with specialists to surgeries and hospital stays⁷. Protection policies work differently again: some pay out if you are covered for life insurance for terminal illnesses, mortgage payment protection, critical illness cover or income protection insurance⁸.

The promise is not open-ended. A critical illness policy, for example, may not cover all types of the illnesses it names, so the terms of the particular policy matter⁹. Wedding insurance policies cover cancellation only where it is unforeseen, unavoidable and beyond your control, unless an exclusion applies³. Some home policies, sometimes described as all-risks, do not restrict cover to a list of insured events and instead cover damage broadly, but subject to a number of exclusions¹⁰. The pattern is the same everywhere: the policy names what it covers, caps what it pays, and lists what it leaves out.

What you are buying, in the end, is written in the policy documents you receive when you buy: the policy itself, the schedule that personalises it, and a summary that highlights the key features. Insurers state plainly that limitations and exclusions apply to these policies, and that the policy document is where the details are set out¹¹. The schedule is the page that makes the contract yours: it names who is insured, the dates, the sums insured and the excesses that apply.

Premiums: what you pay and what sets the price

The premium is the price of the promise. Insurers consider a variety of factors when calculating it, and it can vary depending on the insurer, the individual circumstances of the policyholder and the particular risks the insurer is being asked to cover¹². The underlying logic is probability: insurers use risk data to calculate the likelihood of the event you are insuring against happening, and the more likely the event, the higher the cost of the premium⁷. A driver with convictions, a home on a flood plain and a traveller with several medical conditions each present a different likelihood, and the premium reflects it.

Tax sits on top of the insurer's price. Insurance Premium Tax is charged on insurance premiums and covers most general insurance, for example motor and household⁷. That means the price you see quoted is not purely the insurer's own calculation: a standard tax applies to most of the general insurance market before you pay anything.

Premiums are not fixed for life. At renewal the insurer reprices, and the new price can move for reasons that have nothing to do with you: changes to the level of excess and other changes to the level of cover were part of the explanation in one ombudsman case about premium increases¹³. If a price rises, the insurer should be able to explain the basis of the change, and the ombudsman will look at the provider's underwriting and pricing information when it assesses a complaint about being charged more than expected¹⁴. The dedicated guides to how premiums are calculated and insurance pricing rules cover this in more depth.

A broker can help where the pricing is complicated. Brokers are experts who help you decide what type of insurance and level of cover you need and recommend a suitable policy at a price you can afford; they are paid by commission². Whether to use one is covered in broker or buying direct.

The excess: the part of a claim you pay yourself

The excess is the amount you agree to pay when you make a claim, before the insurance provider pays anything¹. A home insurance policy will include an excess amount, which is the amount you must pay before the company pays a claim for damage¹⁵. In travel insurance it is described as an amount you have to pay towards making a claim, agreed when you take out the policy and clear in the policy documents².

How the excess is applied matters as much as its size. Travel insurance policies usually charge separate excesses for each individual claiming under the policy and each section of the policy being claimed under². In one ombudsman case, the policy wording stated that an excess was payable per insured person, for each and every incident, under each and every section of cover¹⁶. A family claiming for a medical incident and a baggage loss on the same trip could therefore face several separate excesses rather than one.

The trade-off is straightforward: increasing the excess may make the policy cheaper, but it can leave you out of pocket¹. Usually, the higher the excess you have to pay, the cheaper the travel insurance¹⁷. That saving is only worth having if you could actually pay the excess from savings or income at the moment something goes wrong. The full guide to insurance excess explains the choices, and excess protection covers stand-alone policies that insure the excess itself.

Cover limits: the most a policy will pay out

A policy limit is the maximum amount your policy will pay out under a certain section, and there may be sub-limits within it². A travel policy might have one overall medical expenses limit and, inside it, smaller caps on specific costs. A personal accident policy illustrates how granular limits can be: one example policy illustration pays £10,000 for loss of a limb, £8,000 for loss of an eye and £100,000 for the death of a policyholder¹⁸. Each injury has its own figure, and the policy pays no more than the figure that matches.

Limits behave differently across product types. Income protection insurance is designed to pay out when other protections stop, such as company sick pay, and allows you to claim as many times as you need, with payouts until you can work again, retire, die or reach the end of the policy term¹⁷. That is a limit measured in time rather than a single sum. Health insurance, by contrast, is typically organised around the treatments covered rather than one headline figure⁷.

The limit only protects you if it matches what you actually own. If the sum insured on your home contents is too low, the insurer may treat the policy as underinsured and reduce the claim in line with the proportion of the premium paid: for example, if a consumer paid £400 but should have paid £500, they have paid 80% of the premium and it is fair for them to receive 80% of the claim value¹⁹. This is known as applying average, and it is one of the most common reasons a payout is smaller than expected. The narrow guide to underinsurance and the average clause covers it, and rebuild cost explains how to get the buildings figure right.

Exclusions: what a policy will not cover

All policies include a list of circumstances that are excluded from cover. One example in wedding insurance is someone deciding not to go through with the marriage³. Exclusions are not hidden: they are set out in the policy document, and the insurer's own product pages state that limitations and exclusions apply, with the policy document carrying the details¹¹.

Exclusions differ by product, and the differences are where people get caught:

• Critical illness cover: some policies might not cover all types of the illnesses they name, so you need to check the terms of the policy you take out⁹.
• Health insurance: treatment for some illnesses, including pre-existing conditions, will likely not be covered by an individual private medical insurance policy⁷. When switching provider, some insurers might not cover illnesses or injuries you have experienced recently or conditions you currently have, even if these are covered by your existing insurer⁷.
• All-risks home policies: these cover damage broadly rather than a list of insured events, but subject to a number of exclusions¹⁰.
• Wedding insurance: cancellation is covered only if it is unforeseen, unavoidable and beyond your control, unless an exclusion applies³.

The practical habit is to read the exclusions before you buy, not after a loss. If an exclusion would leave you exposed to something realistic for your life, a different policy or an add-on may close the gap. Product-specific guides such as pet cover exclusions and gradual damage and wear and tear show how exclusions work in practice.

Compulsory or voluntary excess: how each one changes your premium

Most insurance policies carry an excess, although some travel policies might give the option to have no excess². The excess usually has two parts. The compulsory excess is set by the insurer and always applies. The voluntary excess is added by you, in exchange for a lower premium. When a claim is made, the two are added together and taken off the payout before the insurer pays the rest.

The pricing logic runs one way: usually, the higher the excess you have to pay, the cheaper the travel insurance¹⁷. Raising the voluntary excess is a bet that you will not claim, and the insurer rewards the bet with a lower premium. But the saving is not guaranteed, and the case law of complaints shows the other side of the trade: increasing the excess may make the policy cheaper but can leave you out of pocket¹. Before choosing a voluntary excess, it is worth checking that the combined figure is one you could pay more than once in a bad year, because the excess is charged per claim, not per year.

Telling the insurer the truth when you buy and renew

An insurance contract is built on what you tell the insurer. The rules come from the Consumer Insurance (Disclosure and Representations) Act 2012, which sets out what you must do and what the insurer may do if you get it wrong⁴. In practice, you are responsible for giving a reasonable answer to the question you are asked, taking into account any guidance you are given; if your estimates are unreasonable, the insurer could reduce or decline claims or cancel the policy²¹.

The process is more interactive than many people expect. With individually underwritten policies, the insurer tells you whether the conditions you have declared are covered, and if they are not covered, you may be able to pay an additional premium to have them included²². With travel insurance and pre-existing medical conditions, the same principle applies: you declare, the insurer responds, and the cover you end up with reflects what was agreed²². If your health changes after you buy, the insurer may cover the condition for no additional premium, charge an additional premium, apply an exclusion, or withdraw cover altogether²³.

What happens if you get something wrong depends on how serious it was. Where a misrepresentation was careless and the insurer would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim⁴. Where it was deliberate or reckless, the insurer's options are wider, and in the most serious cases it may avoid the policy altogether. Fraud is treated most severely: if the fraud is sufficiently serious to affect the insurer's ultimate liability, the firm may be able to forfeit the policy²⁴. But exaggeration is not always fraud: to repudiate the claim, the firm must be able to show that the customer was trying to obtain more than he or she was entitled to²⁵. The full guide is giving wrong information to an insurer.

How a claim works, from reporting to payout

A claim runs in a predictable sequence, and knowing it helps you protect your own position at each step.

1. Report it. Tell the insurer as the policy requires. After a flood, official guidance sets out the practical steps for making an insurance claim, including contacting the insurer promptly¹⁵.

2. Evidence it. Show what happened and what was lost. Photographs, receipts, receipts for emergency work and a written list of damaged items all help the insurer assess the claim fairly.

3. Assessment. The insurer checks the claim against the cover, the limits and the exclusions. The rules here are firm: claims must be handled promptly and fairly, and a claim should not be rejected unreasonably²⁶. An insurance claim might require the consumer to pay an excess fee, it might be subject to limits, and the policy will only cover the named policyholders²⁷.

4. Settlement. Payment, repair or replacement, less the excess. Complaints the ombudsman sees at this stage include the insurer arranging repairs that have not fixed the damage, repairs that caused additional damage, a replacement that is not the same as the lost item, and money offered that the customer thinks is not enough²⁸.

5. Complaint if needed. Take it to the insurer first, then the ombudsman.

One point that is easy to miss: insurance payouts can affect state benefit claims⁸. A payout that builds up your savings can change what means-tested benefits you are entitled to, so it is worth checking with a benefits adviser before spending or arranging a large payout. The step-by-step guide to making a claim covers the detail, and loss adjuster or loss assessor explains who may turn up during a large home claim.

Ending a policy early

Policies can end early, from either side, and the rules on money back are clearer than many people assume. Where the contract is terminated under the rules in the Consumer Insurance (Disclosure and Representations) Act 2012, the insurer must refund any premiums paid for the terminated cover in respect of the balance of the contract term²⁹. So if a policy is cancelled partway through its year, the premiums for the unused months are not simply kept by the insurer.

The circumstances of the ending matter. If you cancel within a cooling-off period, or the insurer cancels for a reason covered by the policy terms, the refund follows the contract. Regulator guidance on cancellations and refunds sets out consumers' rights and routes to refunds across financial services, including insurance³⁰. Check whether an administration fee is deducted, and remember that cancelling a policy mid-term does not erase the record of any claims made on it: future insurers will still ask about them.

If the insurer cancels because of something it says you did, such as a misrepresentation, the same Act governs what happens next, and the ombudsman can review whether the cancellation was fair⁴. The full guide is cancelling insurance.

When a claim is refused: complaints and the Financial Ombudsman

If a claim is refused, the first step is the insurer's own complaints process. The policy summary you were given must explain how to complain to the insurer and that complaints may subsequently be referred to the Financial Ombudsman Service³¹. If you are not satisfied with the insurer's response, you can take your complaint to the Financial Ombudsman¹. The ombudsman handles complaints about an insurance company or claim, and receives complaints from consumers about a range of insurance products⁶. It can help with complaints about insurance for your home, car or travel to another country³².

When it investigates, the ombudsman considers the relevant law and regulations, the regulator's rules, guidance and standards, any industry codes of practice and, where appropriate, good industry practice at the time of the event³³. Its redress powers are practical: it might ask the insurer to deal with a claim it has rejected, add interest to a claim that ought to have been paid, pay for more work to be done where the complaint was about repairs, or pay compensation for distress or inconvenience³⁴.

The ombudsman's approach to refused claims is fact-specific. In underinsurance cases it looks at whether the questions the insurer asked were clear and specific, whether the information the consumer gave was accurate, whether the insurer would have done anything differently with accurate information, and whether the insurer has been fair in how it handled the misrepresentation³⁵. If the insurer's questions or guidance were unclear, the ombudsman will probably say it is not fair for the insurer to reduce the claim payment by applying average, void the policy, or adjust the claim in other ways¹⁹. In theft claims, it is unlikely to uphold a complaint if the insurer applied the terms and conditions fairly and reasonably, or has evidence the owner did not do enough to guard against theft²⁷. Where an insurer unfairly accepted liability for an accident, the ombudsman tells it to change the way the claim was recorded so the customer's current premium can be recalculated, refund extra money paid, and may award compensation for poor customer service³⁶.

Two related bodies cover edges of the market. The Claims Management Ombudsman looks at complaints about claims companies, including unjustified or unclear fees, delays in progressing claims, inappropriate or incorrect claims advice, and poor communication³⁷. The Pensions Ombudsman covers pension-specific disputes, such as incorrect calculation or refusal of benefits and late payment³⁸.

Free, impartial help is available at each stage: MoneyHelper explains when to use an insurance broker², and the ombudsman publishes plain-language guidance on its complaints process³². The full guide to complaining about an insurer covers time limits and what to include.