a simple guide to getting it right when buying insurance

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Why do insurers & brokers charge fees? Is it purely for profit?

Most insurers do not charge fees (they build these costs into their premiums, because they know that a certain percentage of people will amend their policy in the year), but most brokers do - Why?

Brokers need to charge fees, as they make very little from the insurance policies they sell. A broker or intermediary only earns money on commissions from rpoducts they sell for insurers, which can typically be 5%-15% on motor insurance and 10-25% on home insurance. Commercial insurances vary from 0% (Net Rated) to 40% depending on the type of risk.

If you knwo you're going to make a change to your policy during the year or cancel early, check if there are any fees to pay with the provider before you buy or renew. This will avoid any nasty surprises and you won't end up wishing you had stayed with your old provider (although they probably charge too, but you're unaware as you haven't made a change before). Do you actually know what your current provider charges? Have you checked? Most people don't, because when they're buying their insurance, they're more interested in the price than reading small print.

Here’s the Maths, Yes with an ‘s’, it’s short for Mathematics!

If you take a car insurance premium of £300, take off the I.P.T. (Insurance Premium Tax - Government levy, currently 12% (since 1st June 2017) in the UK on essential insurance and 20% on non-essential insurance (travel)), which equates to £32.14 of the premium; this leaves £267.86 that the broker earns commission on. If the commission is 5%, they'll get £12.76. Now if you take into account wages, printing, postage, property costs, IT costs, advertising, comparison site charges etc , they really don't make anything on this at all. If they do trade on aggregator sites (comparison site), they get charged for every policy they sell on there. Even if you then buy directly with that insurer or broker and not through the comparison sites. These costs can be anything from £35.00 upwards per policy sold (normally £50.00+ fo r the larger comparison sites), so you can see they’re already making a loss. They hope you’ll renew with them year after year and then they will start to make some profit. However, we all shop around each year and as such they may struggle to keep you as a customer. So fees are inevitable to cover their ongoing costs and non-profit making departments like IT, Accounts, Compliance, Marketing and Property Maintenance.

Now you know why they're charged, how much should you expect to pay in fees?

£15.00 minimum for a mid-term change is not uncommon and £50.00 if you cancel. You should also check the insurers cancellation rates, as not all policies cancel on a pro-rata basis (charged for each day you have cover). Some cancel on a short period basis and as such there could be no refund at all after 6 or 8 months cover (and you may still have to pay a cancellation fee!!).

Paying by instalments/direct debit? It’s NOT Pay As You Go!

If you think you can just cancel and not owe anything? Think Again!

Paying by direct debit is often easy for us to help spread the costs throughout the year.  If you cancel early, you think you'd be paid up to date right? - Wrong!  It is not pay as you go.

If there were set up fees or you took out additional products, like breakdown or legal expenses cover, normally there is no refunds on fees or additional products if the policy is cancelled after the 14 day cooling off period. This could mean that although you have kept up with your payments, you could still owe money. So, make sure you check all the terms and conditions for the insurer or broker (or both) and for any additional products you may have added.

Should a fee apply if you cancel before the policy starts or in the cooling off period (first 14 days of the policy)?

Yes, once you have selected or agreed to buy the policy, you have entered into a legal contract. Even if the policy has not come into force, you have agreed to the terms and conditions of the broker or insurer. Therefore, they are able to charge a cancellation fee during the cooling off period or prior to inception. During the cooling off period you will still pay for the time you have had on cover, it is not a freebie! Otherwise, we’d all just keep taking out policies every 14 days and never pay for insurance!

Surely there are no fees in the cooling off period?

Of course there are, otherwise we could all just keep buying 14 day policies and getting a full refund - free insurance, 'Yes Please'!

Insurers and brokers are allowed to charge for the time you have had on cover and charge a cancellation fee, even if the policy has not come into force, because the contract has come into force once you have paid the deposit or agreed to pay the deposit. Therefore, the full terms and conditions that you have agreed to are legally binding, which is why you need to make sure you are aware of all the terms and conditions for both the insurer and broker.

The broker is cancelling my policy because I made a genuine mistake - Why should I pay a cancellation fee?

A genuine mistake, is more than likely a careless mistake.  You should know your insurance and driving history, entering or advising of incorrect information is your mistake. Some comparison sites enter default information, to help you speed through your quote and because some answers are already filled in, you may not check it properly. A common one is length of licence held, you put Full Licence and it calculates to your 17th birthday, but if you didn't pass until years later then the length licence held could be out by years. Also, length of UK residency defaults to your date of birth, but not everyone has been a UK resident since birth.

There is carelessness and not checking your information before buying your policy, but not genuine mistakes. If you have made an error, even if you did not mean to, it is not the insurer or brokers fault (providing they have asked the question, the onus is on you to provide true and accurate information). They still have costs to cover and it is not just pressing a few buttons. They may have paid a comparison site £50, they'll have overheads, such as wages, IT, advertising, property maintenance, FCA costs etc. This is why it is so important to check your details, not just scan over it, make sure it’s right. At the end of the day you buy insurance to protect your assets and to comply with the law, but if your details are not correct why should the insurer pay out, when they potentially may not have covered you in the first place?

Why Do Insurers & Brokers Charge Fees; Just For Profit?