Are we overinsured or underinsured? The insurance industry is keen on talking about the “protection gap” – the difference between the number of policies we have and the number of policies they think we should have (a great deal more). But there are occasions when it would be fair to say that we are more over than underinsured. Ever flown with Ryanair? Then there is a good chance that you did so with two travel insurance policies to your name. This month’s issue of Moneywise magazine tells the story of Mark Barber, a London communications consultant, who found to his bemusement – after he had processed his payment – that he had somehow managed to buy travel insurance along with his ticket. He didn’t need it – he already had his own insurance – and he couldn’t remember ticking a box asking for it.
That’s because he didn’t, says Moneywise. Instead he was a victim of what the industry calls “inertia selling”: unless you specifically untick a box you automatically get travel insurance. It cost Mark £11.50 – plus of course the time and effort of calling to complain. And it isn’t just travel insurance the big firms use this trick with. There is mobile-phone insurance from Vodafone; you get it ‘free’ for three months but then you have to make the effort to cancel it or you will be charged. Then there is premium protection insurance: this is a particularly poor value product that is regularly tacked on to life insurance with the idea that if you can’t pay your premiums the insurance will pay them for six months (not very long). Payment Protection Insurance (PPI) is another classic inertia product. It comes bundled with personal loans and is supposed to cover your repayments if you are off work for any reason. The problem with this is that – unlike travel insurance – it is often worse than useless. It rarely pays out and costs a fortune (up to £3,000 on a £10,000 loan).
Of course, our inertia isn’t the only thing insurers like to exploit. Even more lucrative is our fear. Take critical illness insurance. The idea of this is that it pays you out a lump cash sum if a long-term illness makes you unfit to work. The problem is that it doesn’t. For every 100 policies sold only about three claims are ever made and one in five of those fails. Why? Because it only pays out if you suffer from one of a very specific list of ailments (cancer, heart attacks and strokes) before your mortgage is paid off or you reach 65, and because the insurance firms are good at refusing claims based on minor legal details. So if it is useless why do so many advisers suggest so many of us buy it? Simple. Their commission on it comes to 120%-plus of the first year’s premiums. So if you spend £800 a year they get more than £1,000 for a couple of hours’ work. That makes sense – for them.