Is cutting insurance to save money ever a good idea?

'Self-insuring' could save you money compared to some types of insurance - but other types of cover remain essential

Pressures on household budgets have resulted in 9% of Which? Members cancelling an insurance policy since January, according to a survey of 1,025 Members in August. 

Over the same period, 8% reduced their cover levels, while 6% are considering cancelling or reducing insurance in the next year because it's becoming difficult to afford.

This comes as the Financial Conduct Authority highlights concerns about consumers cancelling insurance due to the cost-of-living squeeze, reminding insurers to support struggling customers.

Axing your insurance isn't a decision to take lightly, but you can do more than just hope for the best. 

Some ex-policyholders are turning instead to self-insurance - making regular deposits into a dedicated savings pot, and using this to pay for incidents they'd have otherwise made insurance claims for. 

We've modelled how this could play out in practice.

Self insurance in practice

We examined how self-insuring could play out if used to replace breakdown, pet and dental insurance. 

Over 10 years, our saver places the equivalent of the insurance premiums they would have paid into savings instead. For each insurance type, they use this fund to cover either a relatively minor set of mishaps, or a more serious series of incidents. 

For each scenario, we calculated whether the self-insurer would spend less overall than they would have by taking out insurance - including typical excess payments and policy limits - plus whether they'd need to top up their savings to cover any claims. 

To keep things simple, we've disregarded inflation (of insurance premiums and the cost of paying for incidents) and savings interest.

Dental cover

We surveyed 46 Which? Members who'd continuously owned dental cover for 10 years or longer. Of these, just over half (53%) had made a claim in the last decade. 

To examine how self insurance might work as an alternative to paying for cover, we compared using a policy costing £225 a year, to putting that amount into savings instead.

In our first scenario, our hypothetical patient needed to cover £1,735 in costs over 10 years of annual checkups plus one filling, one crown, one emergency surgery and two dental cleans. Taking into account the policy limitations (how much it contributes towards dental care) and the savings left after ten years, this was £1,003 less expensive to do through savings than insurance.

In our second scenario, we dialled up those dental visits - assuming our patient needed treatments or scans each year, and five cleans, in addition to their annual checkups. Here, the savings fund faltered; to meet costs they'd have needed £1,135 more than they'd saved.

However, if they'd been insured, payouts would have been limited - often to only 50% of the treatment, leaving them to pay £1,218 on top of their premiums. They'd therefore still have saved £83 by self-insuring.

• Verdict: Self insurance ultimately wins in both scenarios.

Breakdown cover

Of 519 owners of breakdown cover we surveyed, 53% had used their cover in the last ten years of ownership.

With breakdown cover, you're paying for a dependable service in emergencies. But, purely in terms of counting pennies, self-insuring could add up. Our driver puts £96 each year into savings - roughly the cost of a roadside assistance plus home breakdown policy.

In our first scenario, over 10 years, our driver pays a total of £555 to call out breakdown services in years two, five and eight. Their savings easily accommodate this, with £405 remaining.

In our second scenario, our more breakdown-prone driver has to pay £825 for five call-outs in total. Overall, this still leaves £135 of their £960 10-year savings. 

However, thanks to two breakdowns in consecutive years, the second of which is a pricier motorway recovery in year five, they have to top up earlier than planned to cover a temporary £75 shortfall.

• Verdict: In both scenarios, the self-insurer financially comes out on top - but not all breakdown cover providers are equal

Pet insurance

Pet insurance was one of the most well-used forms of cover in our survey. Of 46 customers surveyed, 83% had made at least one claim in ten years.

In our scenarios, our dog lover put £408 into annual savings - the average Which? members paid to insure a dog last year.

After three uncomplicated vet bills, spread evenly over 10 years, Fido's owner was left with £2,167 in the bank. If they'd paid the same into premiums, they'd be this much poorer plus an extra £300 they'd have paid in excesses.

However, the impact of a single serious claim can turn the tables. In our second scenario, Fido's owner needs to find £9,000 in year 10 for a hip replacement. Their savings fall over £6,000 short. 

Had they been insured, their cover would only have contributed £3,920 towards this claim after caps, excesses and co-payments are accounted for - but being insured would still have left them £880 better off than they'd have been self-insuring.

This example demonstrates how even a considered self-insurance strategy could be upended by an unexpected, costly vets bill.   

• Verdict: The best option depends on the severity of claims.

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Self-insurance scenarios in detail

[a] Based on average premiums of three major dental and breakdown insurers, and the average paid by Which? members to insure a dog. Dental policies are mid-level policies covering private dental treatment; breakdown policies include home assistance. [b] Total you must pay on top of regular amount saved over 10 years. [c] Whether the cost of an incident exceeds the amount saved at any point [d] Self insurer must supplement savings with extra cash in six of the 10 years. [e] Self-insurer must top up by £75 in year five to cover a claim for which they don't yet have enough saved. They can account for this by reducing a later year's savings. [f] Premiums plus contributions you need to make towards claims due to cover caps, excesses or co-payments. [g] Total you'd pay with insurance minus total cost of incidents.

How often do people use their insurance?

Insurance is designed to help you when disaster strikes. Fortunately, disaster doesn't usually strike that often. 

In our survey of 1,025 Which? Members, we asked how many owned breakdown, home emergency cover, boiler cover, private health insurance, dental insurance, pet insurance, mobile phone or gadget cover, or a healthcare cash plan. 

Owners who'd held these products continuously for the last decade typically hadn't claimed more than three times over that period. Only a quarter (24%) of mobile phone insurance owners had claimed at all in ten years. Pet insurance was most used - with 83% of owners having claimed.

Unless you value the peace of mind mobile phone insurance offers, the chances of needing to claim on it - and what you'd stand to lose without it (the cost of replacing the phone) - means you could probably survive without it, especially if you have some emergency savings for repairs or replacement costs.

But with some insurance, such simple calculations don't take into account the huge potential value of the protection. 

Good examples are home, car and, if you travel, some form of travel insurance. Without cover, you're making a bet you might not be able to afford to lose.

Take home insurance. Your house is unlikely to burn to the ground, but if it were to happen, the cost of rebuilding and replacing destroyed possessions could easily spiral into hundreds of thousands of pounds.

'I'm satisfied with my decision to replace pet insurance with savings'

When Which? Member Michael Rose (pictured, above) adopted his mother's 11-year-old cat, Lily, he was already paying £124 a month to cover two other cats, Hugo and Keats. He thinks the cost of adding Lily to his insurance would have increased the premium to nearly £200. 

He told us that while he's a 'great believer in making sure you've got adequate insurance for the great risks in life', he felt he could build enough funds to cover his three cats by putting £150 into savings each month. 

Michael knows the fund risks being depleted by a large vet bill, but feels that this risk is tolerable. He also has other savings to fall back on. 

After two years of self-insuring, with two withdrawals (equivalent to what his insurer would have paid towards claims), the fund balance is £1,916.

• Find out more: how to find cheap pet insurance

5 things to think about if you're considering self-insuring

While it may be tempting to strike premiums from your outgoings, self-insurance isn't the answer for everyone - and could be a choice you regret if you go into it blindly.  

1. Is it right for you?

While our scenarios often favoured self-insurance on paper, carefully consider if it's right for you. You'll be taking on risk that would otherwise be the insurer's. 

Even if your combined 10-year savings would be enough to cover costs overall, bad timing of a pricey incident may cause you short-term cashflow issues. 

At worst, you might be unable to get the right treatment for your pet, for example, because of a lack of resources.

2. Check the alternatives

There may be ways of reducing your insurance costs without dispensing with the insurance entirely. 

For example, you can partially self-insure by increasing your excess to the maximum you could afford to pay out of pocket in a claim. 

This affords you protection against catastrophic costs, without paying more than necessary for the cover. 

3. Investigate the costs

If you do choose to self-insure, work out what's needed to grow a robust self-insurance fund. 

There's no foolproof way of predicting events, but you could explore typical costs of incidents and how they might add up. 

You might choose to save more than the equivalent of insurance premiums to allow for worst-case scenarios.

4. Keep your plan flexible

Be ready to adjust your plan if circumstances change - for example as your pet ages and becomes more illness-prone. 

It's similarly worth keeping an eye on prices periodically, so that you can stay confident that your self-insurance fund is keeping pace.

5. Be disciplined

There's a difference between self-insuring and just hoping for the best. 

Keep your self-insurance savings account ringfenced from other savings and stay on top of regular deposits. 

Try to keep your fund growing, even if you can't consistently deposit the same amount.

• Find out more: the best savings accounts