Insurance Wise Buys and Rip-Offs!

Some insurance policies are well worth having, while others are a complete rip-off. We put five types of protection to the test.

A quirky law known as Barth's Distinction goes as follows: There are two types of people: those who divide people into two types, and those who don't. For the record, I'm one of those people who separate the public into two groups.

For example, here are two types of people: those who buy insurance, and those who don't. Then again, it's perfectly understandable why some people choose to avoid insurance. After all, as I warned in How To Win Insurance Claims, getting a payout from some firms can be like squeezing blood from the proverbial stone.

Nevertheless, we should not tar all insurance policies with the same brush, as there is a huge variation in the peace of mind and value for money on offer. So, without further ado, here are five types of insurance which I've put to the test. For each policy, I've provided three ratings (each on a scale of one to ten) and an overall mark, as follows:

         Likelihood of making a claim. In other words, what are the chances that you will need to ask for a payout? I've included an average figure, but you may wish to adjust this to reflect your own personal circumstances.

         Impact of any loss. What will the impact of this unforeseen event be? The answer could range from the trivial to the catastrophic. For example, having your bicycle pinched is fairly trivial, but dying and leaving your partner without enough money to pay the mortgage could be catastrophic.

         Value for money. Taking various financial factors into account, such as payout ratios and profit margins, how competitively priced is this cover?

I should point out that this isn't an entirely scientific test, but it is backed by my two decades of experience in the insurance industry. Anyway, let's start with one of the most widely held insurance policies in the UK...

1.    Car insurance = Must Buy

It's a legal requirement to have a minimal level of car insurance, which explains why we Brits spend over £10 billion a year on this cover. The market for car insurance is fiercely competitive, with hundreds of providers, which makes it easier to shop around for lower premiums.

Likelihood of making a claim: 9/10 (very few drivers go through life without making one or more claims)

Impact of any loss: 7/10 (although, of course, claims range from petty thefts and vandalism to total write-offs and road deaths, so the impact can differ widely)

Value for money: 9/10 (but only 4/10 if you always renew with the same insurer!)

Further reading: Get 60% Off Your Car Insurance

2.    Extended warranties = Don't Buy

As I warned in this article, you should be careful when Christmas shopping and, indeed, at all other times of the year. That's because eager salespeople will be queuing up to flog you rip-off extended warranties. My advice would be to reject these every time and, instead, rely on the manufacturer's guarantee and your wide-ranging rights under the Sale of Goods Act.

Likelihood of making a claim: 3/10 (most modern appliances are fairly reliable)

Impact of any loss: 2/10 (we can get by without almost all of our consumer durables)

Value for money: 1/10 (that's a Worst Buy rating, of course)

Further reading: When Electrical Goods Go Wrong

3.    Home insurance/buildings and contents = Wise Buy

If you own your own home, then I believe that it's essential to have buildings insurance. Otherwise, a flood or fire could destroy your greatest asset. As for contents insurance, it all depends on how much you have to lose. I know one Fool writer who (like a quarter of UK households) doesn't have contents insurance, purely because his family possessions are fairly modest. Still, a low-cost home insurance policy provides solid peace of mind and, at the very least, catastrophe cover.

Likelihood of making a claim: 6/10 (events range from accidental damage and burglary, to fire, flood and storm damage)

Impact of any loss: 6/10 (but fire or flooding could be particularly disastrous)

Value for money: 8/10 (but only if you shop around)

Further reading: How To Buy Home Insurance

4.    Life insurance = Wise Buy

If no-one would suffer financially as a result of your death, then you don't need any life insurance whatsoever. On the other hand, if you have a partner and/or dependent children, then your demise could have serious fiscal consequences. The good news is that life insurance premiums have tumbled over the past decade, making this protection more attractive than it's ever been.

Likelihood of making a claim: 1/10 (few of us die before reaching retirement age)

Impact of any loss: 10/10 (assuming that you have a family when you kick the bucket)

Value for money: 9/10 (nowadays, this market is intensely competitive)

Further reading: Top Tips For Buying Life Insurance

5.    Payment protection insurance (PPI) = Don't Buy

Of all the insurance policies which I've come across in the past twenty years, payment protection insurance takes the wooden spoon for being the worst. This protection against accident, sickness and unemployment is hugely overpriced, widely mis-sold and difficult to claim against. Yuk!

Likelihood of making a claim: 8/10 (accidents, illnesses and being out of work are common occurrences)

Impact of any loss: 3/10 (assuming that your claim is typical and therefore lasts for under six months)

Value for money: 1/10 (the worst-value insurance imaginable!)

Further reading: Avoid This Enormous Rip-Off

I'm not quite finished with this topic yet, so watch this space for a follow-up article analysing other popular forms of insurance. Be lucky!

More: Get a wide range of quality quotes for insurance via The Fool