Improvised insurance

Insurance policies are an expensive way of giving yourself peace of mind for when a rainy day rolls around. 

It's often the case that you won't need to make a claim. Even if you do need to claim, you may have to pay a large excess charge and your premiums will likely be increased. After all, if insurance companies didn't make more money than they paid out, they wouldn't last for very long!

In this article we will be looking at improvised insurance: a way of giving yourself some peace of mind while cutting out the insurance companies.



What is it?
'Improvised insurance' is a role playing exercise as much as anything else. It means opening a separate bank account - preferably a high interest online savings account or an ISA - and then setting up a standing order to pay regular payments or 'premiums' into it. The difference is that instead of the money going to an insurance company, the money stays under your control.

What's important to remember is that insurance companies make money because the premiums and excess charges they make outweighs the claims that are made against them. Of course, this is not always true for individuals. 

Improvised insurance offers a sort of half-way-house to those who would like some peace of mind but are skeptical about traditional forms of insurance - especially where traditional insurance can be disproportionately expensive and excess charges make it impractical to make small claims.

Be aware that, depending on your circumstances, there are types of insurance that you are legally required to hold such as third-party car insurance and professional indemnity insurance.   



How to set it up
The first step is to open a separate bank account into which your 'insurance premiums' will be paid. Preferably this will be a high interest online savings account (so the value of your premiums continue to rise) or an ISA (so what interest you make will not be subject to tax deductions).

The second step is to decide on your 'premiums'. While you have the freedom to set this figure at whatever you wish, it is a good idea to seek quotes from genuine insurance providers and match their quotes: this is because the quotes an insurance company provides is calculated by carefully weighing your risks. 

Once you have decided on how much you are prepared to pay, set up a direct debit/standing order to your new account. Most banks will offer to do this weekly, fortnightly or monthly, so you can decide which option is best for your cash-flow. Setting up this automatic payment means you don't have to worry about forgetting to make payments, and you can let your improvised insurance cover stack up invisibly: you may be surprised by how quickly your premiums will add up!


Advantages
There are a number of advantages that improvised insurance has over dealing with traditional insurance companies:

• If you have a claim, the money you've saved is immediately available without investigations and lengthy delays.
• You have to freedom to decide the amount and frequency of your payments (though it's advised that you set this to a reasonable figure based on actual quotes).
• The money will always be yours, whether or not you need to make a 'claim'. If you decide to cancel your improvised insurance, or it's no longer necessary, you won't have lost a penny of what you paid into it and you would gain from the interest that will have accrued.
• The cost of your premiums will never increase unless you want them to.
• You can make a 'claim' for anything that needs to be done: there are no fine print setting out what is or is not covered.
• There are no excess charges, technically speaking.

Disadvantages
There are also a number of disadvantages that improvised insurance has over dealing with traditional insurance companies:

• You will only have the amount of 'cover' that your premiums have reached. If you needed to make an exceptionally large claim, you would be out of luck.  
• Because the 'premiums' and the account itself will always be under your control, a degree of self discipline is required so that the premiums continue to be paid and that the insurance money remains untouched except for in a genuine emergency. 
• Certain means tested benefits have savings limits, which may render improvised insurance less suitable than traditional forms. 

Conclusions
Improvised insurance strikes a fair balance of advantages and disadvantages which makes it a reasonable half-way-house between not being covered at all, and buying traditional forms of insurance. If you've been stung by insurance before but are still keen to have some peace of mind, then improvised insurance may be your answer.