Insurance policies are there to give you peace of mind, not simply bulk up your insurer’s bank balance.
With that in mind, make sure you avoid expensive payment protection insurance (PPI), pointless extended warranties and irrelevant mobile phone insurance.
Not only are they all extortionately expensive, but providers are notoriously tight-fisted when it comes time to make a claim. We take a look at each in detail.
Payment protection insurance (PPI)
What is it? PPI is designed to cover payments on a debt – usually mortgages, credit cards or personal loans – should you fall ill, have an accident or become unemployed.
Why should you avoid it? PPI is expensive: Banks make profits in excess of 900% from when selling it, pocketing £1,200 from a policy that costs them just £20. With the high profit margins on offer, many lenders have been trying to sell these policies too aggressively, or mis-selling them to people who they know will have no chance of claiming.
The worst thing you can do is automatically tack on a lender's Payment Protection Insurance, as this is by far the most expensive – cover for a £10,000, four year loan at Britannia Building Society costs an additional £2,627.
Do you still want it? If you do want to purchase PPI, make sure it’s from a standalone provider, as this works out up to seven times cheaper. As an illustration, a policy for the above loan at British Insurance will cost you £379 in total.
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Extended warranty
What is it? This insures any product (usually electronic or white goods) against damage once the manufacturer’s guarantee expires.
Why should you avoid it? As we mentioned above, most products come with a 12 month manufacturer’s warranty, so you’re covered against most situations already. Extended warranties also come with a host of exclusions – wear and tear, accidental damage or damage by computer virus – that negate its usefulness. Those with home contents insurance may find they are covered under that as well.
You’re further protected by the Sales of Goods act, which states that goods of unsatisfactory quality must be repaired or replaced at the seller’s expense. They also cost anywhere up to 65% of the purchase price of the product you’re looking to cover. As they are most often used to cover electronic goods, which depreciate rapidly in value, you often end up in a situation whereby your cover costs more than the product is actually worth.
Do you still want it? Is there really no way of talking you out of this? If you absolutely must have extended warranty, then the only way to make it worth your while is to get it for free. To do this, get a Nationwide credit card (unless you already have one, of course), which offers free extended 12 month cover on most electrical and white goods purchased with the card.
Note that it’s essential you pay off the debt within before the interest free offer on new purchases expires (three months), or the interest you accrue will render this trick useless.
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Mobile phone insurance
What is it? It’s all in the name, really - an insurance policy for your phone.
Why should you avoid it? It’s often sold unscrupulously. Many people are forced into taking one out as part of their mobile phone contract and given the option to cancel after a given period (usually three months), but of course by this stage many people have simply forgotten about it.
This is a big mistake as mobile phone insurance is ridiculously expensive, given what it covers, costing anywhere from £4 to £12 a month. Remember that the majority of phones on the market are worth no more than £100 to £150, so you often pay more than half that again in premiums over the course of a year.
Claiming for a lost phone can be like getting blood from a stone
Should you actually need to make a claim, beware: These policies are riddled with exclusions - such as not covering any damage that is covered by the manufacturer’s guarantee - or vague fine print that gives the insurer room to manoeuvre.
Do you still want it? If you do want to insure your phone, why not cover it – and your iPod for that matter – under your home insurance policy? This will work out far cheaper - Norwich Union offers personal belongings cover from around £15 a year for £2,000 worth of cover as an extension to its home insurance, with a single article limit of £1,500.
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