Should I pay to protect no-claims discount on home insurance?

Dear Jenny,

I was recently renewing my home insurance. At the end of the process, I was asked whether I wanted to protect my no-claims history. I have never heard of this or known how much no-claims bonus I have on any insurance. Is it worth doing?

Name and address supplied.

Jenny says: The principle of no-claims bonuses or discounts is simple: when you go a full year without claiming, your insurer rewards you with a discount on next year’s premium. For each claims-free year after that, you get a bigger annual discount. This doesn’t keep increasing forever, though. Each insurer has a maximum discount – with home insurers you’ll typically hit this after five years; with some car insurers, it could take as long as 20 years.

A key difference between car and home insurance is that with car insurance, not every kind of claim you make will eat into your no-claims discount (NCD).

Claims where you weren’t at fault (i.e. where your insurer was able to recover anything it paid out) don’t count, and neither do claims for your windscreen or windows. Claims where someone else was responsible (“no fault” claims), won’t have any impact on your no-claims bonus. With home insurance, any type of claim can affect your discount.

Like premiums, NCDs tend to be revised each year. So even assuming you maintain a claims-free record, you won’t be able to predict your future discount, or how yours compares with other customers with the same number of claims-free years.

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While an NCD might look generous on paper, the real value of the deal all depends on your underlying premium: a £500 premium with a 20 per cent discount is still cheaper than a £1,000 premium with a 50 per cent discount.

Once you’ve reached your insurer’s maximum discount, any additional claims-free years won’t have any bearing on your discount.

If you do make a claim, the impact on any discount you’ve built up can be severe: with some car insurance policies, for example, making a single claim could chop your discount in half, sending your premium soaring.

This is where no-claims bonus protection comes in. It’s an optional feature where you pay a little extra on your premium (often in the region of £50), and in exchange your no-claims bonus is kept intact even if you claim. With most insurers there’s a limit to how many claims are protected – typically two claims over a three-year period.

A common misconception is that NCD protection shields your premium from the effects of claims. But if you claim, and that claim is protected, an insurer could still increase your premium as a direct consequence of the claim – and the hike can be however much it chooses.

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NCD protection prevents insurers from lowering the discount that’s applied to this (potentially inflated) premium. In other words, you can limit the financial damage of claims by paying for NCD protection, but you could still see your premium go up.

When weighing up whether it’s worth paying for no-claims bonus protection, consider how much discount you’d lose by claiming. There’s no easy answer, but as a rule of thumb, the bigger your discount the more you stand to lose through making a claim – which makes paying for protection more worthwhile.

You say that you’re not sure how much your no-claims bonus is worth, so start by getting in touch with your insurer to find out. This is especially important to know if you’re thinking of switching insurers – particularly in the case of car insurance, as you’ll often be asked to provide proof of your no-claims entitlement in order for this to be honoured by the new insurer.

Jenny Ross is editor of Which? Money. To have your question featured on this page, email business@inews.co.uk.

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