Don’t cut back on insurance in the current economic environment

By John Kemp

About one in five people have either cancelled or cut back on their insurance cover to cope with the cost of living. This is according to a recent article in The Times based on research conducted by the personal finance website Smart Money People.

Whilst insurance might be an area where some savings can be made; I believe this could be a very short-term strategy leading to far bigger problems in the future.

You can’t avoid some types of insurance. If you own a car, it is illegal to drive it on the road without a minimum of third-party insurance cover (although according to the Motor Insurers Bureau one million drivers are uninsured in the UK and 3,000 are caught every day). And if you have a mortgage on your home, the lender will insist that you have adequate insurance cover to protect the building.

But most other types of insurance are optional and many neglect to take out a policy in the first place or don’t renew it when finances are tight.

I am a great believer in the value of insurance and probably a bit too cautious. I have my central heating system insured as well as most major household appliances. I prefer the monthly cost to a large, unexpected bill. When I was much younger, I won a prize for an article about insurance. I quoted Sir Winston Churchill who once said:

“If I had my way, I would write the word “Insure” over the door of every cottage and upon the blotting book of every public man, because I am convinced that for sacrifices that are inconceivably small, families can be secured against catastrophes which otherwise would smash them up forever.”

That article dates back over 40 years and the quote from Churchill is considerably older but what he said is still valid today.

Yes, insurance companies make money out of the policies they sell but the objective is to spread the risk of unexpected events. The odds that you have an accident on holiday, your pet developing a serious illness or your house burning down are low. But if any of these events do occur the cost to you could be catastrophic.

According to the insurance company Admiral, 16 million people have no contents insurance and no savings to replace lost or stolen items. Data from the Financial Inclusion Commission suggests that 60% of low-income households (typically tenants, young people and social housing residents) have no contents insurance whilst being at greater risk of burglary.  An annual policy is likely to cost under £100 or £1.90 a week.

Research from ABTA states that 38% of holiday makers go on holiday abroad without travel insurance. They are putting themselves at risk of paying substantial medical bills or repatriation costs if they fall ill or hurt themselves. Many believe that the government will bail you out if you get into trouble, but this is not the case. A typical policy to cover a two-week holiday may cost around £20 but a potential medical bill could run into tens of thousands.

The Association of British Insurers state that the average pet insurance claim was £848 in 2021 but could be in the thousands. Specialist treatment and surgery for a puppy with hip dysplasia can cost over £13,000. But just under half of pets are not insured. Pet insurance can be costly, and some people prefer to self-insure. This means they save the same amount of the insurance premium each month to accumulate a fund towards future problems. Sometimes this works but is the risk worth taking? Pet insurance varies considerably according to the breed but as an example a Labrador puppy would cost around £15 a month for basic cover.

Compare the Market conducted a poll of 3,000 UK adults that found that a third had no life insurance. Often employers provide death in service insurance, but small businesses usually do not. In the event of someone dying without life insurance their family is likely to suffer severe financial hardship. A 24-year-old male taking out £150,000 life insurance for 25 years would pay a monthly premium of around £5.

Other types of insurance that are frequently offered to consumers are:

Appliance cover – insurance to cover the breakdown of household appliances such as washing machines, freezers, cookers and central heating systems. These policies usually cover the costs of repair and may provide a replacement if not repairable. Being a cautious soul I prefer to insure this risk but this is an example where self-insurance may be effective.

Mobile phone cover – with the high cost of mobile phones today (something I didn’t need to think about when I wrote my original article), there is also insurance available to cover loss or damage to many people’s most important possession, their mobile phone. Cover starts from around £3 a month. But check to ensure that your contents insurance does not already cover this risk. This is another example where self-insurance may be worth considering.

Vehicle Breakdown cover – This covers you for recovery and minor repairs to your vehicle. New cars often come with the first few years cover free of charge. AA’s basic cover starts from around £50 a year. Cars are much more reliable these days so if your car is reasonably new and in good condition you may be prepared to risk forgoing such insurance. But if your car is older and you frequently travel long distances then do not neglect this type of cover.

Medical cover – More usually something for the most well-off households, this provides private health cover in case of accidents or illness. Luckily in the UK we all benefit from the National Health Service but in other countries such as the USA, individuals have to pay for their own health care. If you want to speed up your treatment it can be worth having if you can afford it but certainly a luxury in terms of insurance cover.

Critical Illness Insurance – provides cover for particular illnesses, often cancer related. It is usually added to life insurance policies and pays out a tax-free sum if you are diagnosed with a serious medical condition. Costs vary with age but simply add a few pounds to the monthly life insurance premium.

Public liability – If you are self employed this is an essential requirement and cover you for any damage you might cause on customer’s premises and other obligations you may have to customers. Too complex to cover here but should not be neglected by businesspeople.

To summarise, don’t neglect insurance even if your finances are under pressure. By all means shop around for the cheapest cover and consider self-insurance on lesser risks. Take Churchill’s advice and always consider the benefits of insurance.