The Risks Of Buying Cheap Insurance

When you buy an insurance policy you should check the exclusions in the contract. But don't assume that a policy with lots of exclusions is always a bad thing.

I have no problem at all with insurance policies that are filled to the back teeth with exclusions. These are absolutely perfect as budget insurance solutions, provided the policy is cheaper to reflect its limitations. This isn't always the case - often policies are no better than the cheapest available, but three or four times the price.

But I would say that you must read the small print. At The Fool we've always said you should do that. Not only must you read it, you should also understand it, and in particular understand what it means to you. Each of us has different circumstances.

There are so many exclusions out there, we can't list them all. All we can do is to give examples of those to be found in many policies. As I wrote in It's Time To Buy PPI:

`...don't forget that these policies have many exclusions and limitations. Read the small print thoroughly to ensure it's suitable, and strongly consider getting income protection insurance instead.'

We've written about the sorts of exclusions to look for in various articles. In one, for example, I wrote:

`To resolve emergencies, you can buy home emergency cover which will cover temporary repairs for some of these things. It's important to read the exclusions though; for example, plumbing problems related to radiators are covered, but the radiators themselves aren't, nor is the cost of replacing parts damaged due to wear and tear. And there are many more exclusions where that came from!'

Other articles with examples of exclusions include this one on critical-illness insurance: Cover For Nasty Ailments, and this on home insurance: Whatever You Do, Don't Claim Like This!

The other caveat I would add is that these policies are only any good if the buyer is aware of the exclusions and still finds that the policy covers what he/she wants.

When we can use these `poor' policies to our advantage

Some policies are so littered with exclusions and poor terms that they are rendered worthless to most people, but if your needs are just right, they're a great place to look for bargains. A home-contents insurance policy that pays for damage caused by cats only wouldn't be worth if for most people, but if all you own is one expensive sofa and a vicious cat that likes clawing things, such a policy, priced reasonably, is not a bad thing.

Some policies have exclusions and are over-priced. Others are more fair though. If a policy is offered cheaply precisely because it has so many exclusions then it's worth looking at.

PPI, critical illness insurance, mobile-phone insurance, travel insurance, buildings insurance, and all the rest that often catch people out should be fine provided you buy it at a price that reflects the exclusions. It's no problem if you're happy that all the risks which are excluded are not big risks for you.

You could save a lot of money on more expensive products by reviewing some of these cheaper ones that are often dismissed as inferior. But please remember that they certainly won't be suitable for everyone. You have to:

• Seriously consider their worth to you.
• Review the T&Cs.
• Consider whether any risks that you need cover for are excluded. Could you `self-insure' by using your savings?

You could also consider some of the cheaper policies that have better reputations, such as the alternatives to PPI, medical insurance and life insurance. Read about them in Cheap Ways To Protect Your Income, Health, And Your Family.

Why can't The Fool just tell me what the exclusions are?

We can't consider every item of a policy and explain it to you according to every individual's circumstances. For each policy we would have to write huge documents many times the size of the policy booklets.

However, if you see a policy you're interested in, you can always get a second opinion from the helpful Fools on our General Insurance discussion board.

Tell them about your personal circumstances, why you want the policy, and ask politely for their opinion of it, and it's suitableness for you. It's a great way to get a free second opinion from people who are used to reading small print. And a third opinion, and fourth...

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