Don't pay for pointless insurance cover

Everyone is trying to cut costs. More than a fifth of us have scaled back the level of our car and home insurance in the past year, says insurance firm Esure. So now's a good time to consider what insurance you need and whether you have any policies that can be scrapped.

Must-have insurance

Firstly, the insurance you shouldn't cancel. The law requires you to have car insurance and, if you have a mortgage, your mortgage provider will insist you have buildings insurance. So all you can do to cut the cost is shop around for the best deals. Try websites such as www.confused.com and www.moneysupermarket.com.

Nice-to-have insurance

We all dread them, but burglaries, fires and floods do happen, so don't scrimp on your home contents insurance. But keep the cost to a minimum by shopping around and regularly reviewing the personal items you actually want to be insured. For example, if you own jewellery or furniture as family heirlooms, it may not be worth bumping up your insurance premium to cover them if you know you'd struggle to replace them anyway.

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I'd always get travel insurance too. Hopefully you'll never need it, but should the worst happen when you're abroad you don't want to be worrying about how to pay overseas medical bills. If you travel regularly, consider paying for an annual policy it'll be cheaper than covering multiple trips separately.

For every life insurance policy applied for over the past year, ten pet insurance policies have been taken out, reports Rachel Robson on Lovemoney.com. Indeed, according to Robson, "more and more of us are putting our pets' lives ahead of our own."

I disagree. Life insurance and pet insurance are two very different things. Life insurance pays out only in the event of your death, whereas pet insurance pays out to prevent your pet's death. While we humans can scrap health insurance and take our chances on the NHS, you won't get far taking a sick dog to your GP. And with vets' fees soaring, a sick pet - particularly if it's, say, an accident-prone puppy - can be a huge drain on your finances. For example, the average price of an x-ray on a dog is £163 according to Whatprice.co.uk. Meanwhile, many surgical procedures could set you back over £1,000.

By comparison, pet insurance costs between £4 and £10 a month. To compare policies, visit Moneysupermarket.com/petinsurance. If you have a decent amount of savings then you may not need to bother. If not, then it's well worth having in order to save any difficult decisions in the future.

As for life insurance itself, it's only worth having if you have a family that would be left in dire financial straits if you die. If you don't have children or a partner who is reliant on your wage, then life insurance is largely unnecessary.

If you decide you need it, check your employment contract. You may find your employer provides you with life cover as part of your contract. If not, then consider buying a term assurance policy. This is the simplest and cheapest type. You choose how long the policy runs - this can be anything fromone to 30 years, so you can set it to expire at a point in the future when your mortgage is paid off or your children have left home. If you die within the term, the insurer will pay out a lump sum. Typical monthly costs are £16 for a man and £13 for a woman, according to Ian Cowie in The Daily Telegraph (The end of the world? Life insurance premiums tell a different story).

The alternative is a whole-of-life policy, but these are more expensive and you are buying cover that you may never need. If you are retired, for example, you may already have substantial savings and no dependents.

One to avoid

For a pointless policy look no further than Payment Protection Insurance (PPI). This promises to cover your debt repayments, perhaps because you have been made redundant or are seriously ill. It is a great money-spinner for banks as it is expensive and very few people ever claim on it.

So they try to sell it at every opportunity. For example, as swine-flu fears sweep the country, MoneyHighStreet.com is warning everyone to check their PPI cover in case they contract it. But on that basis, you'd pay for PPI every time you thought you might catch a cold.

Save your cash - complaints about PPI make up around 25% of all complaints sent to the Financial Ombudsman Service each year, with the vast majority upheld. One of the most frequent complaint is that the few people who ever actually attempt to claim on their policies (4% of policy holders in 2007) find that a quarter of them are rejected due to tiny mistakes on lengthy claim forms.

The same problems afflict many critical illness policies too. The theory sounds great a policy that pays a lump sum in the event you are diagnosed with a serious illness. However, in reality there are many exclusions prostate cancer may not be covered, for example and monthly premiums can be very high, especially as you get older. Besides, there's an alternative.

Create a disaster fund

A far better idea is to start saving into a "disaster fund" and set aside the money each month for emergencies.

Lastly, avoid ID theft insurance, mobile phone insurance, wedding insurance, heating cover or extended warranties. They are all worthless, so consider ditching the lot and making regular payments into your new disaster account instead. It'll cost you less each month and you won't have to deal with an insurance company if you need the money.

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