Risk and insurance

Life has risks: phones break, bikes are stolen, accidents happen. Insurance is one way to manage the cost of things going wrong.

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Managing risk

Risk is the chance that something bad happens, and how much it would cost.
You can avoid a risk (do not do it), reduce it (use a bike lock), accept it (pay if it happens), or transfer it by buying insurance.
Gambling is a risk with money where the odds are set so that, over time, the bookmaker or operator wins. Most gambling, including the National Lottery, is for over-18s only.

How insurance works

Many people pay a small amount, called a premium, into a shared pool. The few who suffer a loss make a claim and are paid from the pool.
The policy is the contract that says what is covered.
The excess is the part of each claim you pay yourself.
Insurers will not pay for things the policy does not cover, so read it carefully.

Types of insurance

Car insurance is a legal requirement for driving on public roads (at least third party cover).
Other common types: home contents, travel, phone or gadget, pet, life and health insurance.
Insurance is not always worth it: compare the premium with the cost of replacing the item, and check whether you are already covered (for example, by a home contents policy).
TermMeaning
PremiumWhat you pay for the insurance, monthly or yearly
PolicyThe contract saying what is covered
ClaimAsking the insurer to pay for a loss
ExcessThe part of a claim you pay yourself
Worked example

Phone insurance costs £7 a month with a £50 excess. Your phone is stolen after one year. What has it cost you in total?

  1. Premiums for a year: 7 × 12 = £84.
  2. Add the excess you pay on the claim: £84 + £50 = £134.
  3. Compare this with the cost of a new phone to decide if insurance was worth it.

Answer: £134 in total (premiums plus excess).

Key idea

Manage risk by avoiding, reducing, accepting or transferring it. Insurance pools many small premiums to pay the few who claim. Key words: premium, policy, claim, excess. Car insurance is a legal requirement for driving on public roads.

Key words
Insurance
Paying a premium so that an insurer will pay for certain losses if they happen.
Premium
The amount you pay for insurance, monthly or yearly.
Excess
The part of an insurance claim that you pay yourself.

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  1. Lucy pays £15 a month for phone insurance. What is the £15?

    1. The excess
    2. The claim
    3. The premium
    4. The payout
    Show the answer

    Answer: The premium

    The premium is the amount you pay for insurance.

  2. Your policy has a £100 excess. Your stolen bike was worth £400. How much will the insurer pay?

    1. £400
    2. £500
    3. £300
    4. £100
    Show the answer

    Answer: £300

    The insurer pays the loss minus the excess: £400 minus £100 = £300.

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Sources and references

Checked by the GCSE-ready editorial team, 23 October 2026. Last updated 2 October 2026. Spotted a mistake? Tell us and we will fix it.

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