Do you need insurance? Consider ditching certain policies

Insurance if often a sensible option. However, I have a different opinion to many others on this matter. I’ve often heard that insurance is “spending a little now, to save a lot in the long-term”.

However, if this was truly the case, insurance companies would lose money in the long run. They don’t!

Therefore, I would say the opposite is true. In fact, insurance is “spending a lot in the long-term, to save a little now”.

Either way, whether you need insurance is specific to every person and every scenario. However, insurance isn’t always required. In fact, it is an unnecessary expense for many. Do you need insurance?

 

Is it better to be safe than sorry?

In the UK, we tend to take out insurance for everything. Car insurance, life insurance, buildings insurance, contents insurance, warranties, extended warranties. The list goes on.

Insurance companies earn revenue through the premiums we pay. Their costs include various costs. These include admin costs, payroll costs, depreciation, repairs, maintenance, consultancy fees, rent, etc.

Only a fraction of their costs are actually related to the payouts made on insurance claims. Below is the top 5 insurance companies in the UK and their annual profits in the 2012 financial year:

The top 5 publicly listed insurance companies in the UK make a total of £64,614m per year. This represents the difference between the insurance fees we pay and the claims we make.

 

How much does it cost each of us?

So, what is this cost of insurance for all individuals in the UK? Most crudely, we could divide this figure by the total number of people in the UK. The 2011 consensus told us that there were 63.2m people living in the UK. Therefore, this represents a cost of insurance of over £1,000 (the cost being the price paid, less the claims received) for each person. However, this only looks at the top 5 insurers and includes all children and babies!

Let’s look at some typical households. According to a Guardian article in mid 2011 (note that these figures will have increased since then), the average figures of costs in the UK are:

This brings us to a similar figure (ignoring specialist insurances). Therefore, the cost of insurance reasonably seems to be around £1,000 per year.

 

Do you need insurance?

We take out insurance to cover the potential cost of losing or damaging a product. However, the majority of insurances should only be taken out in order to replace something that we can’t afford to replace. Often, this isn’t the case. We are losing money because we are scared of variance. However, over 10 categories of insurance, over many years, the variance is not significant.

From the list above, life insurance is often recommended. However, this does depend on your personal circumstances and your dependents. Here is a discussion by Fine Tuned Finances on the matter of the need for life insurance.

Equally, motor insurance is a legal requirement.

These total around £600 per year. This means that the cost of insurance related to unnecessary policies for the average household is over £400. The most unnecessary of these is insuring luxury goods (iphones, televisions, dvd players, etc). For these items, the failure rate in the standard normal warranty period is extremely low. After this period, we pay high amounts to insure these products through extended warranties. However, these products (especially technologically advanced items) have lost most of their value by this time anyway.

£400 per year, over 25 years at the average bank interest rate, totals around £23k.

 

Money saving tips

• For essential insurance products, use price comparison websites to obtain the cheapest insurance deal which meets your needs

• Never take out insurance on any product that you can afford to replace

• Never take out insurance on products which quickly depreciate in value

 

Where to go if you do need insurance?

So, you have determined that you need insurance for your home, car or other product. Insurance policies offering similar levels of cover can vary wildly between different providers. Therefore, it is essential that you compare different products before purchasing. Shop around and get the best value product available!