Introduction to Protection

Most of us hate paying for insurance (a.k.a. protection) on the basis you're paying out money for something you hope you'll never need.

However, some insurance is compulsory (e.g. motor) and other types such as home and life insurance will probably help you sleep more peacefully at night.

It can be foolish to ignore insurance altogether, but very wise to only buy those insurances that are actually worthwhile with the right amount of cover at a good price.

How does insurance work?

The concept is very simple. You give an insurance company some money, called a 'premium', in return for them agreeing to cover your costs should a specific event occur. So, for example, they could agree to reimburse you should your shiny new car be stolen.

The insurance company will estimate the chances of that event happening and then set a premium that should ensure they make a profit.

Insurance company A insures 100 people who own a car, worth £5,000, from being stolen. The company believes the chances of a car being stolen over the next year are 1 in 100 (i.e. 1%), so it sets the premium at £100 per person. This generates £10,000 for the company and, because they only expect to payout £5,000, gives them an anticipated profit of £5,000.

The profit in the above example could be even higher if no cars are stolen, but if two cars are stolen the company makes no money and three or more will mean a loss. One of the key jobs for an insurance company is therefore to manage their risk to minimise the likelihood of a loss.

This is why insurance companies vary premiums based on how risky they view your business (known as 'underwriting'). For example, if you live in an area with high car crime you'll be charged a higher premium than someone who lives in a low crime area, all other things being equal.

Insurance companies also try to make money by investing some of your premium. The chances of all the money received from premiums having to be paid out in claims are slim, so the company might invest some in the hope it will boost profits. Obviously, they need to ensure there's still sufficient cash to pay claims, so must get the balance right. There are usually strict rules in this respect to protect customers.

The other key thing to understand is an insurance policy 'excess'. Some policies require you to pay the first part of a claim, typically ranging from a few pounds to hundreds. This is to discourage frivolous and fraudulent claims, in theory keeping the costs of premiums lower than they otherwise would be.

Types of insurance

The insurance industry is massive and, chances are, whatever you want to insure you can probably find someone willing to do so. However, in everyday life there are really two broad categories:

• Insurances covering you against illness and death (e.g. life, critical illness, medical and travel insurance).
• Insurances covering your possessions (e.g. home, motor and travel insurance).

Do I need it?

In an ideal world you'd be insured against everything bad that could happen to you, so at least you and your family wouldn't have financial worries if something bad does happen.

In practice the cost would be prohibitive, so you need to strike a balance between cover you feel necessary and cost. For some that still means quite a lot if insurance, for others it could mean almost none at all.

When deciding whether you need insurance it helps to think through the following points:

• Is it a legal requirement? If so (e.g. motor insurance) then you've got no choice but to buy it.
• Do you already have cover? Don't duplicate any cover you might already have. For example, some employers provide their employees with cover against illness and death.
• Imagine worst case scenarios then think how you and your family would cope without insurance. If things would be difficult then you need to weigh up the cost of insurance versus the peace of mind it would give you.
• Would it be cheaper to take out insurance now rather than wait until you're older when premiums might be higher? (by no means a cast iron argument, but worth bearing in mind).
• Is the policy a long term commitment or can you cancel, without penalty, if your needs change in future?

Things to consider when buying insurance

Beware of insurance salesmen and financial advisers who push insurance. While they should make you aware of insurances that might be appropriate, be very wary if you get the hard sell. Insurance companies tend to pay high sales commissions to advisers, so they may have their best interests at heart and not yours.

Ways to buy

InsurerInsurance BrokersComparison WebsitesFinancial AdvisersDiscount Brokers

While this might seem simple, there's a high chance you won't get the best deal unless you've shopped around extensively beforehand. However, this is an increasingly attractive route if you use Internet 'cash back' sites such as Quidco or Topcashback, as they receive and then refund to you the commission that might otherwise have been paid to a broker, comparison website or salesman.

In theory brokers trawl the marketplace to find you the best deal, saving you much legwork and money. In practice it pays to be cynical. Most brokers receive commissions from insurance companies for selling policies, possibly tempting them to steer your business towards those companies paying the highest commissions. While some brokers do provide an excellent service and do genuinely find competitive deals, don't assume this is always the case.

A modern day, autoamated, version of the insurance broker. These sites compare quotes from a large number of insurers in minutes, making it simple to compare deals - athough you'll get no advice. While they receive sales commissions from insurers, you can at least view all quotes yourself and decide which is the best deal for you, removing the risk of bias. Not all insurers (or types of insurance product) feature on these websites and deals vary, so it's a good idea to compare several if you want to increase the likelihood of bagging a good deal.

It's a bit cheeky, but you might save £££s by using a comparison website to find a good deal then going to that insurer directly through an Internet cashback website to receive the commission paid by that insurer. It doesn't always work, but it's well worth a try.

Financial advisers tend to advise on health-related insurers. They'll usually receive a commission from the insurer for the sale, which they should refund to you if you're paying them a fee for their advice. If you feel you need help then a good independent adviser can be worthwhile when buying income protection, critiical illness or private medical insurance - they should know the policies inside out and recommend the best policy for your needs.

If you're comfortable choosing a policy yourself then a discount broker should save you £'s. You won't get advice but they'll refund some of the commission they receive. A few brokers will even refund all their commission in lieu of a fixed fee, often the cheapest route.

If you buy a policy over the phone or Internet, or from a salesman who visited your home or place of work, you normally have 14 days to change your mind (called a 'cooling off' period). If you buy insurance you then feel you don't need, check whether you have the right to cancel.

Problems when making a claim

Insurance is worthless unless you actually receive a full payout when you make a valid claim. While the majority of claims go smoothly, it's not always the case, the most common problems being:

Insurer doesn't pay the full amount of your claim

This can happen when the level of cover on your policy is insufficient or the insurer believes the value of your losses claimed is unrealistic. In the latter case there may be room for negotiation, especially if you can prove the amount claimed is accurate and realistic.

Insurer refuses to pay your claim

This can happen when the claim is not covered by your policy, you've broken the conditions of your policy or neglected to pay premiums.

If you believe that your insurer is behaving unfairly then you should send them a formal complaint in the first instance. If they do not resolve the issue you can take your complaint to the Financial Ombudsman Service.

Protection Jargon

Here's some of the more common protection jargon you might come across:

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