Recently, my wife and I were up for renewal with our home and contents insurance. Every year about this time we get our notice from our current insurer about our cover, and it’s at this time that I then go on the hunt using aggregators like Compare The Market.
Once again Budget Direct was the cheapest for our insurance needs, and I was able to successfully renew our insurance needs.
There are a couple of ways you can reduce your home and contents insurance, without reducing the value of your home. What can help you more in achieving these savings is by already having some savings in your bank account that is commonly referred to as an emergency fund (as also mentioned by Dave Ramsey), as by having this facility it can help reduce your insurance costs.
Well, here’s what I could do to reduce my home and contents insurance:
- Increase excess;
- Paid annually; and
- Reduced coverage amount for contents.
Let me explain each in a little more detail and the affect each change had on the overall cost of the insurance cost.
The biggest factor when paying for any type of insurance is the amount of excess you are willing to pay with any claim. This means when you suffer loss of the insured item, and you make a claim to recover the cost or replacement of that item, the insurance company will reduce the claim by the excess amount.
For example, I recently had to put in a claim for my wife’s reading glasses when we were on travel. I purchased some travel insurance before going on the trip and during that holiday someone had taken off with her reading glasses while she was in the pool. When we came home we filed our claim for the cost of replacing the glasses and the insurance company reduced the replacement cost by the excess of $50.
If the replacement cost of the glasses were $50 or less there would have been no need for us to have made a claim, but as they were around $800 to replace, we could recover a portion of that cost, less the excess amount.
And here is why insurance companies like policies with larger excesses – there are fewer claims!
Therefore, if you have an emergency fund, an amount of money set aside for incidents that crop up, you can easily fund these mishaps from your pool of cash, rather than having to get a loan.
As we have an emergency fund that could help sustain us for the next 6 months (if I were to lose my job), I could increase our home and contents insurance excess by a larger amount and thereby reduce our insurance cost. Here’s how the changes in our home and contents insurance affected the overall cost of our insurance coverage (no other values were changed but the excess):
|Excess Amount||Insurance Cost (Annual)|
As you can see from my home and contents insurance, as we increased the excess amount the annual insurance cost reduced dramatically from $2,209 to $713 a saving of nearly $1,500 ($1,496 to be precise)!
By paying an annual amount, the insurance company gets their money up front, rather than having to collect it monthly. Therefore, paying monthly would attract a higher cost because of the extra admin needed to manage payments from customers.
Here was the difference, with the same insurer, if I elected to pay our home and contents insurance monthly instead of annually:
|Paying Monthly||$76.55 / month|
|Total Cost (12 Months)||$919.01|
As can be seen from the data, we would be paying an extra $206 over the course of the year by paying monthly, then we would be paying annually.
Reduce Contents Coverage
Another minor benefit for having an emergency fund is that it can be used to help purchase for items that end up getting destroyed or stolen. This means we do not need to rely on the insurance coverage for contents as much as we would if we didn’t have an emergency fund.
By reducing our contents coverage from $50,000 to $20,000 it would save us an additional $7.00 per year off the total bill. As this wasn’t a sizeable amount I left our contents insurance at the stated $50,000, but this does highlight another additional saving should one have enough in their emergency fund where they could easily fund their contents.
Overall, we saved a total $1,702 off our home and contents insurance bill, just by having an emergency fund that could help cover and pay for the excess with any claim, and allow for us to pay for our bill annually.
I could in a few years, if I’ve saved enough, reduce my insurance bill further by minimising the coverage amount. I looked at this by reducing our contents’ coverage, but as this only provided a $7 benefit didn’t think it was warranted. However, it could be something over time that might reduce if I have enough cash to cover the costs of replacing furniture and other contents within the home.