How much insurance do you really need?

The inboxes of personal finance journalists can make for terrifying reading. Every week press releases arrive packed full of stories about awful things that have happened to people, or that could soon happen to them.

There are stories of people breaking their legs in seven places on skiing holidays and having to be airlifted back to Britain; of families having to spend entire package holidays in the same clothes because their suitcases have been lost; of brides spilling red ink all over their £3,000 dresses; of people having their dogs stolen or losing £400 worth of belongings from their handbags and so on.

It's miserable stuff. But there is a common thread: the people in question are always declared to have not had enough insurance to "protect" them from calamity.

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Had they had the correct travel insurance, pet insurance, wedding insurance or contents insurance, we are told, things would have been so much better.

Insurance: how much is really necessary?

All these stories, as you will probably have guessed, come from insurance companies and they are sent with one thing in mind: to terrify Britain into buying ever more insurance.

If the financial-services industry had its way we wouldn't leave the house without being insured against everything from dropping our lipstick down the drain at pedestrian crossings to being abducted by aliens outside Tesco Metro.

It has even gone so far as to invent a special phrase for the difference between the amount of insurance we do have and the amount of insurance it thinks we should have the "protection gap." And how big is this gap? £2,300 billion apparently.

This is complete nonsense. There are a few insurances you are legally obliged to have, such as car insurance, and a few that you really should have buildings and travel. But beyond that I'm not convinced that most of us need much: in general, insurance is both overpriced and unnecessary.

I can't see, for example, why one needs much in the way of contents cover. There may be a case for insuring things you need for living against flood or fire, but why pay good money to cover things that you would never sell and could not replace your grandmother's jewellery for example.

Insurance: why you may already be covered

You may not need life insurance, either. If you check your employment contract you will probably find, if you are a white-collar worker, that you have life cover at three to four times your salary as standard and that a pension may be paid to your dependants too.

If you are not the main breadwinner in the family or if you have no dependants you definitely won't need life cover, and if you are at or near retirement you shouldn't need it either. By then you should be free financially (mortgage paid, pension sorted, children independent) with no need for the extra cash. Much the same goes for critical-illness insurance, which is practically impossible to claim on anyway.

Then there is health insurance. Large numbers of people appear to take it for granted these days that the NHS is awful and that, if they can afford it, they should insure themselves against ever having to use it. But this just isn't the case.

Worse, medical insurance is utterly useless in an emergency: private hospitals don't have accident and emergency departments. Medical insurance also doesn't come cheap. The least expensive policy I could find for myself came in at £20 a month and covered almost nothing. I would have to be practically dead before I could claim on it.

Insurance: set up a 'calamity account' instead

The alternative to paying out all this money is simply to save the cash you might have spent on insurance (note that proper health coverage starts at about £50 a month and goes up to £200-plus) into a special account and then to pay for any treatment you don't want to have on the NHS yourself.

The things that are really pricey are mainly those operations that you won't need until you are heading for your sixties (hip replacements cost about £7,000), so if you start saving early instead of paying for insurance you should be able to pay for them without much trouble.

You can think the same way about most other insurances too. Pet insurance is at least £100 a year but, again, unless you go for the top of the range, covers very little. You might as well put the cash into your special savings account (let's call it your Calamity Account) instead.

The same goes for mobile-phone insurance, ID-theft insurance, wedding insurance, payment-protection insurance (this is a particularly expensive and useless one) and extended warranties (even more expensive and useless). Instead of taking out any of them I think you'd be wise just to put the cash into your Calamity Account instead.

It is entirely possible that your cat may get run over at some point, but very unlikely that in the same week your phone and identity will be stolen, your wedding dress will be covered in red ink, you will be made redundant, your hip will give way and your house will be burgled.

That should mean that if you are disciplined about saving the money you aren't spending on insurance, you should always have enough cash to cope. You will also have the satisfaction of knowing that you have, at least in this case, thwarted the financial-services industry in its ongoing efforts to separate you from your money.

First published in the Sunday Times 6/8/06