Peace of mind - the insurance policies you must have

Not only do millions of us waste millions of pounds a year on general insurance by not shopping around, large amounts of money also goes to waste on unnecessary cover that simply isn't really needed. In some cases cover is duplicated while in other cases you just don't need it.

If you get a benefits package from your employer, you need to double check that you are not duplicating your insurance cover and shelling out when you don't have to. Many packaged bank accounts provide free insurance products and, before leaping out and buying more, you need to think about what you already have.

Sometimes if you buy from the same provider, not only do you get a discount, the products are more likely to be designed to dove-tail into each other reducing duplication. Policies for car insurance, buildings insurance, household contents insurance and travel insurance are a must, while personal policies such as medical and critical illness are for those that can afford it but others such as alien abduction or poltergeist cover (honestly!) are a complete waste of time. However, there are no hard and fast rules about this. What you need depends on your lifestyle and what is important to you.

Our homes are our largest asset yet around 20% have no cover for the building or contents. This means you would have to pay for the rebuilding of your home and its contents should it be flattened. Once you have paid off your mortgage don't forget you still need buildings cover. Lenders won't hand over the money for a mortgage unless buildings insurance in place but you still need to ensure you have contents cover. Renters in particular are lax at insuring their possessions with almost half (44%) having no cover.

Third party insurance for motorists is compulsory by law but you should consider extending it to fire and theft; and fully comprehensive is even better. If you intend to drive outside the UK, you should notify your insurer. If motor breakdown cover is not included in your policy, the additional £80 to £180 a year it may cost is usually money spent well.

If you like holidaying abroad and weekends away, don't forget the travel insurance. Frequent travellers should take out an annual policy, which is likely to be cheaper than paying for single trips. If you are planning a holiday in the snow make sure you tell your insurance company and, if necessary, get extra cover added to your policy.

Life assurance will pay off the mortgage in the event of your death and is needed if you have dependents. Research commissioned by Sainsbury's Bank found that 4.2 million mortgage holders do not have life assurance. This means that £217 billion in mortgages is not protected by life cover. What you will pay depends on your age, state of health and term of the policy but it doesn't cost a fortune.

If you have substantial financial commitments, you should seriously think about protecting your income either through mortgage payment protection insurance or income protection insurance. These types of policies will provide you with an income should you lose your job because of sickness or unemployment. Mortgage insurance would provide an income for a year giving you time to get a job or recover while income protection, more suitable for older people, gives you an income until you return to work or die.

Payment protection insurance for loans and credit cards can be useful as well but beware of lenders and card issuers who offer single premium policies. Often they add the cost of the policy to the loan and then charge interest on it as well. There is a growing scandal over inappropriately sold payment protection policies. It seems too many people have been 'persuaded' to take such insurance out but have found themselves unable to claim it when needed.

With vets' fees set to rise by 20% over the next three years as medical equipment gets more high tech, pet owners often seriously underestimate the cost should their pet become sick or injured. Perhaps surprisingly, only a small percentage of pet owners are insured. If you own a dog you need to be aware that without pet insurance you would be liable should your dog cause damage or cause a car accident. Pet insurance gives you third party cover often up to £1million or £2 million and covers you for vets' fees as well. Considering cover is only around £6 a month for a cat and £8 to £10 for a dog, it could be worth every penny.

Other types of insurance policies simply pray on our desire for peace of mind. Wedding cover, for example, is not really a necessity unless you plan to wed overseas or plan to spend a fortune and mobile phone cover sold by phone companies are often more expensive over a year than the phone itself (and you may find a clause in your household insurance already covers you).

Extended warranty insurance on white goods and electrical items is heavily marketed by retailers. There is a reason for this. They make vast profits on the policies. If you want the peace of mind extended warranty insurance is meant to offer, decline the retailers' blandishments and look elsewhere for more cost effective cover.

15 February 2006 © Moneyextra.com

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