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Is having home insurance a luxury during a cost of living crisis?

Inflation is the highest it has been in decades. Energy costs are soaring. People all over the UK are feeling the need to cut back. Should your home insurance be on the list of Direct Debits to cancel?

Man working out his budget
The cost of living crisis is leading to some difficult decisions for consumers

(Firstly, cost of living crisis or not, you should never just cancel a Direct Debit to cancel an insurance policy. Whilst it might avoid you making an immediate payment if one's due, it is unlikely to cancel your insurance. You're more likely to start getting chase letters (or worse) for owed money, and you don't need that!)

So back to the original question:

Is home insurance something that you absolutely must have?

Home insurance is not like car insurance. There are no laws in the UK that say you must have it. However, if you own your home with a mortgage, your mortgage likely has a condition on it that says you must always insure the buildings for the major risks such as fire, storm and flood. For most homeowners, you can get cheap standard Buildings only cover that protects against major risks like fire, storm and flood. It's not uncommon to see quotes for £500,000 or more rebuild (and that's a pretty huge property if it costs that much to rebuild!) for around £70 a year or £6 a month. So if you just need to keep your mortgage company happy but strip back to basics, a standard Buildings only policy might meet your immediate needs.

So, what about all the other types of home insurance extras like Contents and Accidental Damage cover? Firstly, we've got to remind ourselves of the whole point of a home insurance policy. It's there to cover your losses if something goes wrong. If nothing goes wrong (perfect result!) then we've paid our premiums and it's money gone that we'll not see again. It's not like paying into a pension that one day will give you something back in return for handing over your money every year. And that's why it can be easy to think it's cover we can do without. Unfortunately, this is a risk people take all the time and something both Mike and I have dealt with, and that's in the good times. So, if something does go wrong - a fire, a break in, a burst pipe in the loft - you'd be glad to have paid that money out. It all comes down to what we as the consumer think the chance of that if moment happens and its before we choose to cut our cover.

Let's start with Buildings, and the parts that are normally optional or some kind of cover level upgrade.

  • Unlimited Buildings Sum Insured. It sounds great having an unlimited amount of cover to rebuild your home in the event of a disaster. It's one less thing to think about if you know your sum insured is always going to be high enough. But, if you've bought your home relatively recently, or have had a survey as part of a remortgage valuation, the surveyor likely gave an indication as to the rebuild cost. A lot of insurers work on a blanket cover basis of £500,000 or even £1,000,000 on their standard policies. If your rebuild figure is below these amounts - and the vast majority of homes will be - there really is no meaningful benefit to you being on an Unlimited (and often higher cost) cover level. It's also worth remembering as well that insurance companies have access to huge amounts of data about our properties. They'll know roughly what they would expect it to cost to rebuild your home, regardless of the amount of cover you ask for. So if your home would cost £150,000 to rebuild, they'll likely price your policy based on that amount but give you the blanket sum insured or Unlimited sum insured. There's not much point asking for more cover here than you actually need.

  • Buildings Accidental Damage. To accidentally damage the structure or fittings of your home sufficiently enough to warrant making a claim (bearing in mind the excess too) can take some effort. If you're not into DIY, you don't have or don't use your loft or attic, and you're not prone to leaving taps on or dropping heavy items on expensive tiled flooring, chances may be slim that you'd ever claim on this cover.

  • Home Emergency. Buying this cover standalone from one of the utility companies can be notoriously expensive. The cover offered as an add-on to home insurance can be substantially cheaper, making it a tempting add-on. Of course, every provider - be it utility company or home insurance provider - will offer their own cover limits, so cost isn't the only consideration. But the main coverage is if your boiler breaks down they'll send someone to repair it. So consider the chances of that happening. Newer boilers are super efficient and inherently more reliable than they used to be. And saving a couple of year's worth of Home Emergency premiums should more than cover an emergency call out if you ever needed to. Bottom line, check what your home emergency cover provides and ask yourself if you think it's likely you'll need to use it.

What about Contents insurance?

Some tenancy agreements will stipulate a requirement for you to insure the landlord's fixtures and fittings. The tenant's liability section of a Contents policy usually adequately covers this off for you. But other than a landlord wanting you to cover them for their potential losses as a result of your accidental damages, no one else is going to be insisting that you buy Contents insurance. Not like a mortgage company can when it comes to Buildings insurance for the property the mortgage is secured on. So it's often the Contents insurance that people take a risk on going without. But you don't necessarily need to drop the whole cover to cut back on costs. Let's take a look at a few options:

  • Unlimited or High Blanket Sum Contents. This cover is not as common as Buildings Unlimited Sum Insured. Home insurers can only really guess as what an individual property might typically have in it, based upon approximate size of the property which it can derive from a calculation using data points like the number of bedrooms and when it was built, and then factoring in the number of adult and children occupants. But they can only really guess at what your individual tastes might be when it comes to things like designer clothes, high end white goods and entertainment equipment. Unless your jewellery or any artwork for example is of sufficient value to need to be specified on your policy, they won't have a clue about how much your jewellery and other valuables might be worth. Calculating the replacement cost of your Contents can be a time-consuming and sometimes difficult task, so opting for a higher sum insured can alleviate that to an extent. But if you haven't calculated the cost, how do you know the blanket sum insured is even enough? I've seen countless instances during my time working for insurance companies of consumers being caught out because they didn't take the time to accurately calculate what they needed. If you're in a one bedroom flat, chances are that a £100,000 blanket sum insured for your Contents is going to be adequate for 99.9% of people. But, if you've only got £10,000 of belongings, you'd be massively over-insuring and might just be paying unnecessary extra premium as a result.

  • Contents Accidental Damage. Similar to Buildings, it comes down to the chances of you doing enough damage to warrant a claim. And it's generally accepted that it's easier to do meaningful damage on Contents than it is on Buildings. As a result, the uplift in premium from a standard Contents to one with Accidental Damage can be significant. You don't need to be a keen DIYer to cause costly damage to your home contents. But knocking a swanky 65" 4K UHD TV off its stand whilst doing the vacuuming, or dropping a takeaway curry on an expensive sofa or rug whilst sitting down to watch TV are (hopefully!) not going to be everyday occurrences. Do your quotes with and without Contents accidental damage and see what the premium difference is. It may help you reach a decision.

  • Personal Possessions. It's not that long ago since any of us were allowed to go out and about. But now the world gets mostly back to normal and we start heading back into the office, on nights out and on holidays, cover for the items we take out with us starts to regain some value. However, it can be an expensive add-on where it's not included as standard. I am personally a believer in the value of good Personal Possessions cover. By having it, I'm not having to consider buying separate covers for things like mobile phones which we never leave home without. The same goes for gadgets - if I break my iPad at home by dropping it in the bath (I'm not the only one that watches TV in the bath, right?) then Personal Possessions could pick up the claim, even if I don't have Contents Accidental Damage. Throw in the extra saving by not having to include extra baggage cover on a travel insurance policy and personal possessions can soon pay for itself.

What about legal cover?

Home insurers will tend to offer legal cover with every home insurance policy. If you have separate Buildings and Contents policies for some reason, you shouldn't need it on both. If you have it on your car insurance, that almost certainly is a completely different product so don't assume you can rely on your car insurance legal cover if you have a property dispute at home, for example. There's no denying that legal costs are expensive (like everything else these days) but check your policy covers and weigh up what you think the chances are of you needing to use it. Don't forget to also look at your chances of a claim being accepted for them to take on the case. Policies will tend to have at least a 50% chance of winning threshold for the claim to be even considered. As a result, legal cover can be one of the policy sections that consumers are least likely to successfully claim on.

And other extras?

You may find your insurer offers additional add-ons as part of the quote, and they may attempt to upsell these. Often they are ways of increasing limits for other standard parts of the policy. For example, a standard Buildings policy might already include cover to replace your door locks if they are damaged as part of a break in or attempted break in. But you might need their add-on key cover if you want them to cover the cost of replacing the locks if you happened to lose your only set of keys. Before adding anything to your policy when getting a quote, check what cover is already provided by the base policy. Weigh up what you think the chances are of you needing it and whether the cover offered would cover the loss. If it does, the add-on probably isn't going to be of value to you. It'll only put the cost up.

Final thoughts

As we've seen, there are times when home insurance is unavoidable and also other times when parts of it can be plain unnecessary. At a time when many household budgets are being stretched to their limits, consumers are right to question the value they get from all of their insurances - not just home insurance. So before you tick that box to add in that extra bit of cover, just be sure it's in your best interests. Never pay for anything that covers something you don't have if you can avoid it. Ultimately, if you do end up dropping the £500 iPad in the bath, I'm going to be covered for £500 less any excess. That's whether I'm insured for £500 or £500,000 on my personal possessions.

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