Insurance essentials versus the rip-offs!

Tougher times mean more of us are cutting back on insurance. So which insurance do you really need and which can you afford to lose?

When money is a little tight, one of the first things we tend to do is make cutbacks.

Fair enough, I hear you say. That's a pretty logical decision.

But there's just one problem with this scenario. Many of us are making cutbacks in the wrong places.

According to American Express Insurance Services, more than half of Britons who make regular financial product payments are considering stopping their premiums in order to make ends meet. Insurance products in particular, such as ID theft protection, health cover and travel insurance, are getting the old heave-ho.

But which insurance policies can you get away with cutting back on, and which ones are illegal or dangerous to sacrifice?

Insurance must-haves

Travel insurance

If you're planning a trip away this year, travel insurance is vital. Choose not to take out a policy and you could see a hefty bill being sent your way if you become seriously ill/your holiday is cancelled/your belongings are stolen. If you need further proof of this, just consider the recent outbreak of swine flu and all those flight cancellations!

For tips on how to choose the correct travel cover, read Pick the right travel insurance.

Car insurance

If you own a car, you need to get it insured. That's not just my opinion, it's the law. If you get caught driving without insurance, you'll get points on your licence and a fine.

However, if you are on a really strict budget, you could consider third party, fire and theft car insurance rather than comprehensive cover, as this will be cheaper - and still legal. Just make sure you understand exactly how little cover this offers you. You can read more about this in Ten ways to cut your car insurance costs.

Life insurance

If you have financial dependents, such as children, you need life insurance to protect them financially - it's as simple as that. Similarly, if you have a joint mortgage, you should protect your life to ensure your partner can cope with the mortgage if something happened to you.

If you already have life cover and you decide to stop your payments, it could prove a very costly mistake. That's because if you take out a policy again at a later date, your premiums are likely to be much higher - simply because you're older and your health may have deteriorated.

Stuck in the middle

Home insurance

Home insurance falls into two categories - buildings insurance and contents insurance. In some cases it's a must, in others it's not so necessary.

If you have a mortgage, you'll need buildings insurance - it's a legal requirement.

But it's worth noting that, if you have a leasehold flat, the freeholder will be responsible for taking it out (although you'll probably still have to pay for it, one way or another).

Similarly, if you rent, you don't need buildings insurance.

As for contents insurance, there's no legal obligation to take out a policy. However, in my opinion, it should be a priority whether you rent or own your home. After all, if you were burgled or your belongings were destroyed in a fire, you'd have to fork out to replace everything yourself - and the costs of this could far outweigh the cost of paying for insurance.

Private medical insurance

If you're highly sporty and prone to accidents and visits to the physio, private medical insurance can really pay off.  

But if you never make a claim, you're simply pouring money down the drain. What's more, you're likely to find a range of conditions won't even be covered in your policy - such as pre-existing conditions, incurable or lifelong conditions and mental health problems.

Personally, I'm not convinced PMI is worth it unless you can get it for free/a small fee through your employer.

Insurance rip-offs

Pet insurance

Many people will do anything to protect their pets, including paying out vast amounts of money for pet insurance.

But if you never make a claim, you've wasted a lot of money. So don't make pet insurance a priority - I think you'd be better off putting any spare change in a savings account which could then be used in the event of a pet emergency.

ID theft protection

Identity fraud is becoming an increasing concern for many of us. Having your identity stolen can be an extremely stressful experience, so it's no wonder that more and more people are taking out ID theft protection.

But given that this insurance does not protect against any financial loss you might suffer as a result of ID theft, I'm not entirely sure what the point of it is. In fact, here at lovemoney.com, we think it's one of the most expensive rip-offs you'll ever come across. A better option might be to simply take preventative measures such as the ones mentioned in Ten ways to avoid becoming a victim of ID fraud.

Mobile phone insurance

This is another insurance policy I think you can do without. Policies can be expensive and many come with a range of exclusions so even if you think you're covered, you might not be.

Personally, I think you're better off taking extra care with your mobile phone and keeping an old one as a spare, instead of wasting money on this insurance scam.

Decisions decisions

When it comes to insurance, everyone will have their own opinions and experiences. And of course, deciding which policies to cut back on is ultimately up to you.

But before you cancel any insurance policy, it's worth investigating whether you can make savings elsewhere. Check out our money savings tips for ideas.

And finally, whatever you decide, please don't scrimp on the essentials. Many insurance policies really are important and going without is not a risk worth taking.

Compare all sorts of insurance with lovemoney.com

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