Monday, 15 April 2013

The Cheapest Home Insurance

We've previously run the maths to demonstrate how quickly small regular amounts of expenditure can add up to large amounts.  We've also analysed how it is important to save large amounts if you are chasing financial independence in a short space of time.  This is because over a short period compound interest doesn't really get time to work its magic.  It is therefore crucial to ruthlessly look at every piece of expenditure you make to identify savings.  Those savings can then be invested wisely.

One piece of expenditure that is not small and repeats year in year out in various forms forever is insurance.  Depending on your level of acceptance of risk and life situation you might be paying for car insurance, home insurance, life insurance, travel insurance, health insurance and income protection insurance to name only  a few right now.  That is a lot of insurances.  Let’s therefore pick one and by using Retirement Investing Today principles think through how we might be able to reduce our insurance spend leaving more money for financial independence investing.

In the UK home insurance is a generic term which actually covers 2 very separate insurance types.  The first is buildings insurance which protects you from damage to the fabric of your home and so will cover floors, walls, and roofs.  It usually also protects you from damage to fixtures and fittings such as kitchens and bathrooms.  The second is contents insurance which protects you from loss associated with stuff kept in your home such as furniture, computers and personal belongings.

We’ll look at how we can reduce cost with each type of home insurance in a minute.  However while we have them grouped together one thing I would expect most people, including non Retirement Investing Today readers, to be doing in the modern day is to use price comparison sites to scan the home insurance market for the best deal.  A word of caution though.  No two policies are alike and so you must not just pick the cheapest offering presented by price comparison sites.  Instead you must read all the small print and pick the cheapest product that gives you the protection level you desire.

Let’s now look at each home insurance type in turn to identify a couple of further cost saving ideas:

Building Insurance

Your home is probably the biggest purchase any of us will ever make in our lives.  If you own your home or are renting out a home the responsibility for building insurance sits with you.  This then identifies one saving opportunity.  If you are in rental accommodation, as I am today, then I don’t need buildings insurance as it is my landlord’s responsibility.

Within buildings insurance there are two types, bedroom-rated and sum insured.  Bedroom-rated is the one that offers most convenience as the insurance company estimates the cost of rebuilding your home.  They therefore typically over estimate the insurance value to ensure there is no risk of under insurance.  This means that if you go with this type of policy it is very likely you are over paying.  If you are prepared to invest some time and money up front to calculate the cost of rebuilding your home you could instead go down the sum insured route.  This would mean you would only be paying for the actual protection you need and thus should save money over the long term.

The one method that I definitely intend to use to save on insurance costs is a method that very few in this country use.  It is also a thing this site talks about regularly and is simple when you think about it.  Live well below your means and don’t buy the home you can afford but instead what you need for your chosen frugal lifestyle.  This means you’ll be buying a much smaller place and so assuming all other things are equal (flood risk, age, occupation levels, etcetera) you’ll be saving on your buildings insurance forever.  Those savings can then be invested wisely.  Simple I know but something a lot of people seem to forget when they take on the maximum mortgage that the bank will offer them.    

Contents Insurance

There are three types of contents insurance – bedroom rated, sum insured and unlimited sum insured.  One important point no matter which option you choose is to not under insure   You must make sure your coverage is enough to cover all personal possessions or the payout value for your stuff can be reduced.

The Money Advice Service presents a statistic that the average home has contents worth £45,000.  As a person who has opted out of consumerism and lives frugally I must say my contents are worth a lot less than that.  Therefore the one method that is guaranteed to reduce your contents insurance cost forever is to own less stuff.  Again simple but something people don’t seem to even consider when they buy that new gadget.

Insurance is a minefield and you must make sure you always do your own research.  Today I've merely tried to give some ideas for cost reduction based on the principles that I live – opting out of consumerism, living below my means and practising frugality.  Do you have any other ways to reduce your home insurance costs?    


  1. When I was married we annually renewed our contents insurance, but had rarely claimed for anything of value. I divorced 10 years ago, and in the midst of the legal proceedings, I mentioned in passing to my solicitor that I needed to take out contents insurance in my own right. I was advised to be very careful not to over-insure whilst the divorce proceedings were ongoing, as otherwise my (now ex-)husband would likely use this as evidence that I owned property of greater value than I admitted during the divorce proceedings. (Apparently this is not uncommon during divorce where partners have separated some years earlier.) This warning made me think that I would be better off delaying insurance cover until the divorce proceedings were completed. A risk I know, but one that I decided to take. By the time I got round to thinking about contents insurance again, nearly 2 years had passed and I had the benefit of 2 years insurance premiums in my bank account. This set me thinking about standing my own insurance and in fact that is what I have done for the past 10 years. In all that time I have had no circumstances that would have caused me to claim. I may just have been lucky, but it gets easier to ride my luck every year now that I have a good balance of saved premiums on my side. I wouldn't dream of forgoing buildings insurance though.


  2. Following your lifestyle you can (and should) NOT take out contents insurance, and potentially even building insurance depending on how big your assets are.

    The reason you insure is to mitigate risk, and you pay a 'risk premium' to the insurer in return for minimising this risk(ie, insurers calculate the likelihood of an event, the cost of the event... and then charge you more than what it would take to pay out, this is the risk-premium).

    The thing is, as your wealth increases, the benefit you get from insurance decreases. To take things to the extreme as an example, if you're a billionaire you have no reason to insure your car, because if something bad happens... you can easily afford to replace it - and it doesn't even make a dent in your cash account. However, someone on a much lower income whose car is equal in value to a year's salary should definitely insure that same car, because they value reducing the risk of something happening to it.

    So if you have adequate savings, you shouldn't take out insurance over 'small' things. As your savings increase, what is 'small' will change. For you, as you pointed out in your article, your home contents are very small. Therefore, don't insure it... just bear the risk and replace it if something bad does happen!

    As another example, if once you reach your retirement goal you decide to keep working... would you take out salary protection insurance?

    I hope this helps. BTW, this is another reason why you should never get extended warranty for TVs/computers etc., just replace them if they break!

    (FYI in economic terms, if you plot income on the x axis of a graph and marginal utility on the y axis... at low levels of income there is a steep rise in marginal utility [ie, people at 0 income have 0 marginal utility as they can't afford the monthly premiums so they just decide to risk it] but as your income increases marginal utility will slowly decline back to 0.)

  3. "Insurance is a minefield" just about covers it!

    Self-insuring for Contents often makes sense, especially if you would otherwise opt for a large excess and rarely make a claim anyway.

    However, having been on the sharp end of both car and house fabric claims I would strongly suggest Comprehensive Motor Insurance and Buildings Insurance are well worth the premiums as they can easily result in costs that cannot easily be met from contigency funds.