When you buy something expensive, mechanical or fragile, it’s fairly common to be offered some form of insurance to protect it, at the point of sale.
For example, a mortgage provider might sell you buildings cover for your new home, a car dealership might sell you ‘gap’ insurance on your new car, and so on. But the premiums you pay are usually inflated to allow for a nice profit for the company and to take advantage of your impulse to get everything sorted there and then.
So it is important to remember that you can probably save a fortune by shopping around for cover rather than by accepting quotes at the point of sale. Read on as I explain why you should never buy an insurance extra without doing your homework first.
When you get a mortgage, the lender will usually insist that you take out buildings cover – which insures the property against damage to its structure, such as might be caused by storm, flooding, subsidence or fire.
Of course, it makes good sense to take out buildings cover. It enables the lender to protect its investment and it means you won’t be left out of pocket if disaster strikes – but just because the lender insists on buildings cover, it doesn’t mean you have to buy the insurance it is selling you.
Sainsbury’s Finance carried out some research last year and found 1.5million homeowners wrongly believed they were obliged to buy buildings insurance from their mortgage lender. Although this was the case 17 years ago, since then the Office of Fair Trading has stepped in and said consumers must be allowed to shop around.
As a result, you should now take the lender’s quote and see how it compares to other providers’ using our buildings insurance comparison tool.
If you find a cheaper policy you want to go for, the lender may insist on vetting it to make sure it meets its standards and can refuse if it doesn’t. It may also charge a switching fee if you go with another provider, but don't let this put you off as you could still be quids in by choosing a cheaper policy with that provider.
Guaranteed Asset Protection or ‘gap’ insurance protects the owner of a new or expensive vehicle against the effect of depreciation.
The old adage says that, as soon as you drive a new car off the dealer’s forecourt, it drops hundreds or even thousands of pounds in value – perhaps by a third off the purchase price.
If you were to drive that new car for six months and then write it off in an accident, your insurer would only pay out for the then current market value of the car, which would be substantially less than what you paid for it six months previously.
Gap insurance would bridge the chasm between what your insurer is willing to pay out and what you paid for the vehicle, allowing you to get a like-for-like replacement. Often, gap insurance policies will pay a certain amount towards the excess on your car insurance claim as well.
I’ve got first-hand experience of how car dealerships push their own gap insurance products when you buy a car, and how much you can save by shopping around.
A big-brand car dealership recently quoted me a price of £400 for three years’ gap insurance cover. Surprised by the quote, I did a quick comparison here and found the same cover for £74, saving me a whopping £326.
The important thing to remember here is that it’s only a cheaper quote if you’re comparing like-for-like cover. You might get a cheap quote, but it may not cover you for everything you need it too – so read the small print carefully.
Mobile phone insurance
If you’ve ever bought a new phone or signed up for a pay-monthly contract in a phone shop, you’ve probably been offered mobile phone insurance.
It’s not a bad idea in itself, especially as phones always seem to be getting lighter, thinner and, crucially, more expensive – but buying cover from a phone shop salesperson might cost you more. It could even be completely unnecessary.
For a start, if you have personal possessions cover included in your home contents insurance policy, or you get mobile phone insurance for free through your current account, there’s no point buying cover from the phone merchant as you’ll be doubling up.
But check the wording of your personal possessions cover carefully to make sure it would actually be enough for your new phone. Personal possessions cover protects items you take outside your home, but in some cases, the policy may exclude mobile phones, or it may have a low single item limit which wouldn’t be enough to cover a particularly expensive new phone.
Also, if you have a hefty excess on your contents cover, this could eat into or erode completely the value of your claim. And you’d lose any no claims discount, of course.
Similarly, if your current account offers mobile phone insurance, take a good look at its terms and conditions to make sure you can safely forego the cover offered by the phone shop.
Finally, you could also shop around to see if you can get a better price with specialist gadget cover. Our gadget insurance channel will tell you all you need to know, and you can get a quote in a few minutes.
Anyone who’s ever bought a new fridge, television or washing machine will have been offered the dubious-sounding extended warranty which, for a price, will save you from expensive repairs for a period of time beyond the manufacturer’s warranty.
Having potentially just parted with hundreds of pounds on your new item, you’d be forgiven for being tempted to take out this cover, but there’s no reason to buy from the retailer right then and there.
You can shop around for a better price using our home appliance warranty channel, but first you should read Kevin Pratt’s article on the subject which explains your rights as a consumer and asks: are extended warranties a waste of money?
And your rights as a consumer last 12 months, so the retailer and/or manufacturer would be obliged to correct any faults during the first year.
Don’t be pressured
If there’s one thing to take away from all this, it’s that you shouldn’t buy insurance products at the point of sale just because they’re conveniently offered to you. And don't let a salesperson pressurise you into handing over your money. Remember, they’re interested in the meaty commission they would earn if they made the sale.
The savings you could get by shopping around are potentially huge, and might make you feel a bit better about the large amount of cash you’ve just spent.
The Financial Services Authority (FSA) thinks that people are buying insurance products without having enough information, and has just published a discussion paper which suggests ways to deal with this.
Addressing concerns that some insurance products don’t pay out as much in claims as consumers might expect, the regulator said insurers should publish claims data, giving consumers a better understanding of an insurance product’s overall value.
For example, a company might offer cheap cover, but with a very low pay-out rate, which means it’s not necessarily as good a deal as it seems.
This, says the FSA, would address concerns that insurers try to avoid payouts and could even increase competition, as consumers start comparing products based on value as well as price.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.