The five insurance policies you should have

A sign that says 'flood' sits in deep water in a residential street with the incident likely to have led to home insurance claims (image: Christopher Furlong/Getty Images)

(Image credit: (Photo by Christopher Furlong/Getty Images))

published 14 September 2010

No matter what situation you find yourself in, odds are there will be an insurance policy on sale that will claim to cover it. Just bought a puppy? Then there is pet insurance. Newly engaged? You'll be offered wedding insurance. Brand new phone? Phone insurance. Or if you've got a pile of other expensive things in your bag, there is always handbag insurance.

However, the fact that these products exist doesn't mean you actually need them. The insurance industry likes to worry about what they call the "protection gap" - the idea that we don't have enough insurance. But the truth is that a great many of us have too much. So what are the must-haves, and what can you do without?

The insurance policies you must have

No matter how hard times get, there are two forms of insurance that are necessities.

Car insurance: If you have a car, then you need car insurance. It is illegal to drive without at least third-party cover, so make sure you have it.

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Home insurance: if you have a mortgage, then you need buildings insurance. Your lender will insist you have this to protect their investment. Note: if you live in a block of flats then this should already be in place as part of your service charge, but do check.

But just because you have to have both these policies doesn't mean you should pay over the odds for them. Shop around to find the cheapest suitable policies using comparison websites such as Confused.com or MoneySupermarket.

The insurance policies you should have

There are some insurance policies that aren't compulsory but which you really should get anyway.

Home contents insurance: You might not want to think about it but fires, floods and thefts do happen so it is well worth having this one.

To avoid paying more than you need, be very thorough when you buy it. Go through each room in your house and think about what you would want to replace. If you have antique furniture or jewellery that has sentimental value but which would be impossible to replace, it might not be worth bumping up your premium by including them. However, your clothes are a different matter: outfits are easily replaced, but most people undervalue the contents of their wardrobes.

Travel insurance: don't make the mistake of travelling without travel insurance. Dealing with hospitals in foreign climes is stressful enough without worrying about how you are going to pay for the treatment.

Pet insurance: if you have a cat or a dog, it's worth considering pet insurance. The cost of veterinary treatment has soared over the last 15 years, and advances in animal medical sciences mean that simply putting a sick pet to sleep is no longer the final option. Cats and dogs can now have complicated surgical procedures, chemotherapy and even dialysis. And none of that comes cheap: a blood test for a cat costs around £78, according to Whatprice.co.uk, and getting a dog x-rayed could set you back £222.

In comparison, pet insurance can cost less than £10 a month and cover all your beloved pet's medical costs. If you have plenty of savings you may be happy to pay as and when the situation arises, but if you don't, I'd say pet insurance is an important purchase.

The insurance policies that aren't worth having

There are a large number of insurances that aren't really worth having. These include:

ID theft insurance
Mobile phone insurance
Handbag insurance
Wedding insurance
Extended warranties

With most of these insurance policies, you'll either be paying out more in premiums than you will ever get back, or paying high premiums for a disaster that insurance won't help you with. For example, Insurance4everyone.co.uk is offering handbag insurance which covers the handbag and its contents up to £2,500. But it costs £19.99 a month and you don't really need it – most home contents policies will allow you to pay a small additional premium to include cover for personal belongings outside of the home.

Set up a disaster fund

Instead of handing over your cash to several different insurers in order to cover yourself for every possible disaster that may befall you, create a disaster fund. Set aside a small amount each month into a savings account and then, if calamity finds you, dip into the fund. This way you have the money to deal with any unexpected, uninsured emergencies. But if you have no emergencies, you'll still have cash.

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.