subject: What sort of excess do I need on home insurance? [print this page] What sort of excess do I need on home insurance?
Getting an excess on household insurance can be a very effective way of using money twice. It is a good idea to know why and so to be constantly asking what sort of excess is needed when reviewing the home insurance cover.
The first thing to realise is that insurance costs money, and it has to be designed so that it does cost money. It may seem a very obvious point, but this can sometimes be something that insurance customers forget. To many people insurance is a source of money; they hope to get more out of the insurance than they pay in, whether it is home contents insurance or building insurance.
Insurance in its purest form is the pooling of risk. If a risk is calculated carefully enough and is put over a wide enough pool then it will become a predictable expense. In the case of a house falling down or burning to the ground the wide enough pool are household insurance customers. The only thing that is not adequately known is exactly who is going to have the damage.
In this way it is cost neutral. Unless the householder has a better knowledge of probability than the rest of the people with whom he is insured then the money that is paid out will over time equal the money that is paid in.
However this is not how any insurance scheme that works in the real world actually functions. Insurance has to be administered; this is in itself a cost. For insurance to be effective it also has to make a profit, in order to attract capital and efficient management, and be marketed, in order to bring the pool together. In this way there will have to be more money going in than coming out, and the householder is looking for a house insurance quote that doesn't adequately reflect their risk against a set of companies that have whole departments created to judge the risk. 95% of the time the insurance company will win.
This is not some sort of confidence trick; it is simply providing a service. In this case the service is the ability to deal with an event that would not normally be dealt with. It's a service in the uncertain future, rather than the present, but it is still a service which has to be paid for.
And this is where the excess comes in. (I would have to get to it eventually). By taking an excess the policy holder is cutting down on the service that they are using. In return they are asked for less money and get some cheap house insurance.
Here savings come in use. If the excess on a policy is a good deal lower than the savings that a person has built up (even of medium term savings, such as the savings for a house deposit) then the policy holder is essentially paying too much for insurance. A low excess and a healthy savings account is paying for holding money in the same way that needlessly keeping a credit card balance unpaid is.
To reverse it, think of a high excess as a way of getting double interest. First the policy holder gets the interest from the bank or building society and then they get the interest from the insurance that is not paid. When companies and public bodies do this they call it "self insurance", this makes it clear that the money is actually being used in the most efficient way rather than irresponsibly cutting down on insurance.
Insurance is a very useful service. Few of us have enough in our bank account to rebuild our house or fully replace our home contents. However, it is also the case that most of us are probably paying for insurance that we don't need.
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