Which Insurance Is Worth Buying
Insure what you cannot afford to lose. Everything else is a transfer of money to an insurer in exchange for peace of mind you may not need.
Key points
- Insure high-cost, low-probability events; self-insure small ones.
- Income protection is underrated; extended warranties are almost never worth it.
- Cover you already have through work or a bank account is frequently forgotten.
- Non-disclosure is the main reason claims are refused — answer questions fully.
The principle
Insurance is a transfer of risk, and the insurer charges more than the expected cost of the risk — that margin is their business model. On average, buying insurance loses money. It is worth doing anyway when the loss would be catastrophic rather than merely annoying.
That gives a simple test:
A £400 phone screen is an annoyance. Losing your income for two years is not. The first should come from your emergency fund; the second needs an insurer.
This also explains why extended warranties, gadget insurance and similar products are consistently poor value: they insure amounts you can absorb, at a high margin, often duplicating rights you already have under consumer law.
Generally worth having
| Cover | Who needs it | Why |
|---|---|---|
| Buildings insurance | Homeowners | Usually a mortgage condition; rebuilding cost is catastrophic |
| Third-party motor | Drivers | Legally required; liability is unlimited |
| Income protection | Anyone dependent on earnings | Long-term illness is the most under-insured risk |
| Life insurance | Anyone with dependants or joint debt | Replaces income or clears a mortgage |
| Travel insurance | Travellers | Medical costs abroad can be ruinous |
| Contents insurance | Most households | Replacing everything at once is a large sum |
Income protection deserves particular attention because it is the most commonly neglected. The probability of being unable to work for six months or more at some point in a career is considerably higher than the probability of dying during it, and the financial consequence is comparable. Most people insure the less likely event and not the more likely one.
Generally not worth having
- Extended warranties. High margin, and consumer law in many countries already provides remedies for goods that fail prematurely.
- Gadget and phone insurance. Expensive relative to the item; often already covered by contents insurance or a packaged bank account.
- Payment protection on small loans. Historically mis-sold on a vast scale.
- Identity theft cover. Much of what it offers, you can do yourself for free.
- Life insurance for children, who have no dependants and no income to replace.
- Very low excesses. Raising the excess to an amount you could comfortably pay usually reduces the premium by more than the extra risk costs you.
Check what you already have. Many people are paying for cover they hold twice over: travel and phone insurance through a packaged bank account, death-in-service and income protection through an employer, legal expenses cover attached to home insurance. Reviewing this once often removes a policy or two.
Buying it properly
- Work out the sum required rather than guessing. For life cover: outstanding debts, plus the income your dependants would need, for the number of years they would need it. For income protection: enough to cover essential expenses, not full salary.
- Choose the deferred period on income protection to match your savings and any employer sick pay. A longer wait substantially reduces the premium.
- Answer every question fully and accurately. Non-disclosure is the most common reason claims are refused. If in doubt, disclose it — a declined claim years later is far worse than a slightly higher premium now.
- Read the definitions, particularly on critical illness and income protection. “Own occupation” cover pays if you cannot do your job; “any occupation” pays only if you cannot do any job at all, and is much weaker.
- Consider writing life policies in trust where your jurisdiction allows, so the payout goes directly to beneficiaries rather than through the estate.
- Review after major life events — a child, a mortgage, a job change, a divorce.
Frequently asked questions
Do I need life insurance if I have no children?
Possibly not. The question is whether anyone would suffer financially if your income stopped permanently — a partner on a joint mortgage, a dependent relative, a business partner. With no dependants and no joint debt, the case is weak.
Term or whole of life?
Term covers a defined period and is far cheaper, which suits the usual purpose — protecting dependants until they are independent or a mortgage is repaid. Whole of life always pays out eventually and costs considerably more; it is mainly used for estate planning.
Is critical illness cover worth it?
It pays a lump sum on diagnosis of a specified condition. Whether it is worth the premium depends on the definitions, which vary enormously between policies. Many people find income protection better value for the same money, because it covers any cause of incapacity rather than a list.
Should I use a comparison site?
Useful for price on standardised products like motor and home. Less suitable for protection products, where the definitions matter more than the premium and a specialist broker — usually paid by the insurer rather than you — can be genuinely valuable.