cost to pay for the damage. In some cases having this kind of protection makes sense but it all depends on the premiums you have to pay (i.e. the cost of the insurance), the flexibility of the policy and how likely it is ever to pay out. You need some insurance – some of it is compulsory anyway – but most of it is overpriced and underused. Buying it is often simply no better a use of your hard-earned cash than buying a coat in the January sales that you never wear. You would, in the main, be better off opening a savings account (call it your Calamity Account) and putting all the money you might have spent on insurance into it. Then, if you have a disaster of the kind we are so often warned about, you will have the cash to cover it and if you do not you will soon find you have a tidy – and growing – sum of money to keep. My bet is that your account will rarely be empty.
Below I’ve made a list of some of the insurances the financial services business thinks you should have (it’s not a comprehensive list – they’re always coming up with more) and looked at whether it’s a good idea to have them or if they are just another clever wheeze to part you from your money. Basically, you should only be buying insurance for things you cannot replace, pay for, or forgo without suffering real pain.
Do you need it?
Life insurance? Sometimes
Very often it makes sense to insure against the really big calamities. Small disasters you can swallow from your income; really big ones you probably can’t. However, that doesn’t automatically mean you need life insurance. Yes, if you have a non-working partner and children you need to provide for, but if you have no dependants you just don’t: if you die a lot of people will probably be very upset but as it won’t make a financial difference to anyone why spend your money on insurance now? What difference will it make whether your mortgage is paid or not when you are dead? Put the money in a savings account instead. If you do have dependants it is different – you will probably feel that you want to have some insurance to cover them if something awful does happen. However, you may not need to take out a life insurance policy. Insurance salesmen are big on emotional blackmail. You need to be stuffed up to the eyeballs with life insurance, they will tell you, to ‘protect your family’ (‘How would your family cope without you and your income?’ ‘What happens if the unthinkable happens?’ ‘How much do you matter?’), but don’t be scared into giving them your money when you don’t need to. Don’t forget they get hefty commissions on every policy they sell.
If you check your contract at work carefully you will probably find, if you are a white-collar worker, that you have life cover at three to four times your salary as standard and that a pension may be paid to your dependants. If so, and you have other savings, that may well be enough. If you are not the main breadwinner in the family you also won’t need much insurance, and if you are at or near retirement you shouldn’t need it either. By then you should be free financially (mortgage paid, pension sorted, children independent): your death will not bring financial hardship to those around you so you don’t need to insure against it.
If you are the main breadwinner, are not near retirement and have neither work-related insurance nor sufficient savings what should you do? The answer, I think, is to get the simplest and cheapest form of insurance possible. This is term assurance, which works like this. You choose how long the policy runs for (it can be anything from 1 to 30 years but you should probably time it to run until your retirement or the date your mortgage will be paid off). You then pay annual premiums and if you die within the time specified the insurer will pay out a lump sum to your dependants. The alternative is to buy whole of life insurance, which pays out whenever you die rather than just within a set term. This is much more expensive and I think probably pointless: the idea of the term is that you are covered for as long as you need to be (during the 20–30-year period when other people would really suffer financially if you died) so why pay more to be covered when you no longer need to be?
Car insurance? Yes
Some insurances you have to have and if you drive car insurance is one of them, so all you have to worry about is finding the cheapest policy you possibly can. This is much easier than it used to be. Before the days of the Internet comparing prices meant calling ten different insurers and then choosing the cheapest. Most people never bothered – it was just too boring – and that meant that insurers got into the habit of charging you pretty much what they fancied. Not any more. Today you can log on to a variety of websites such as www.moneyfacts.co.uk, or www.insuresupermarket.com and www.confused.com and compare prices in a matter of minutes. Make sure you do: if you buy without comparing you’ll just be throwing money away. The same goes for every insurance I mention here.
There are distracting gimmicks aplenty in the insurance industry and a new entry to the car insurance market is women-only car insurance. This is an idea based on the fact that women are less dangerous drivers than men and should therefore be able to get cheaper car insurance than men. Both these things are true (Home Office figures show that 96% of dangerous driving offences are committed by men) but that doesn’t mean that buying your insurance from a women-only outfit such as Sheila’s Wheels or Diamond will get you a better deal. All insurers base their premiums on the same calculations of the various risk factors involved in taking on a policy and they all include in their calculations the fact that women are in general safer drivers than men so they all charge them less accordingly. The all-women insurers may offer a variety of amusing perks (Sheila’s Wheels offers handbag insurance and a counselling line you can call after an accident) but don’t be distracted by this. They are just as much businesses out to make maximum profits as the other insurers (Sheila’s is no female-friendly small company, but part of banking and insurance giant HBOS). So whatever you get from them you’ll end up paying the market price for. The same is true when buying insurance for older people: some firms claim to specialize in them but again that doesn’t mean they’ll offer a better deal. So don’t go for the ladies’ policy or the special old people’s policy, just go for the cheapest one.
Wedding insurance? No
This is the insurance I hate most of all. What is the point? If the photographer doesn’t turn up how will getting a cheque for £200 help you to remember your big day? And if the food gives all your guests food poisoning what are you going to do? Claim on insurance and get them all back to eat it again? Of course not. The fact is that the only thing you could really do with insurance against is the wedding not taking place but that would only happen if you or your groom-to-be changed your mind. And no one will insure you against that. So take the £200 you might have spent on wedding insurance and put it in a special account to earn interest and pay for a weekend away on your first anniversary.
Health insurance? Probably not
We hear so often these days that the NHS is dreadful that most of us are slowly becoming convinced that, if we can afford it, we should take out medical insurance. But is it really true? I don’t think so. For starters note that medical insurance doesn’t cover the conditions most of us need treatment for. It doesn’t cover childbirth (not even emergency Caesareans), it often doesn’t cover depression and it also very often doesn’t cover chronic or incurable illnesses such as diabetes, asthma or multiple sclerosis. It is also utterly useless in an emergency: private hospitals don’t have emergency rooms and anyway the NHS never makes you wait more than an hour or two to have a broken leg sorted out. Medical insurance isn’t cheap – the cheapest I could find for myself when I looked was nearly £30 a month and it came with so many exemptions that I would have had to be almost dead before I was able to claim on it.
The alternative is simply to save all the cash you might have spent on insurance
