When robo-insurance gives a bum steer

With a few clicks and a credit card at the ready, it’s easy to buy insurance online. You answer a few standard questions about your situation (“Smoking or non?”), set up an automatic payment (“Would you like fees with that?”), and you’re away.

Website algorithms funnel us into insurance products that should give us the cover we need. If they get it right, it’s incredibly convenient – but if they don’t, we might end up not really protecting what’s important to us at all.

The year before last I bought some cover on the train ride home. It took all of 15 minutes. It gave some peace of mind to know that it was in place, and thankfully I never had to claim for anything.

Then last year, I learned the insurance was entirely wrong for my situation and would probably not have paid out if I had needed to lodge a claim. I had bought something utterly useless.

Can one size insure all?

One challenge online is figuring out how much cover you need. I’m not much of a conspiracy theorist, but it’s easy pretty to imagine that some of the algorithms might end up suggesting a number that’s a bit higher than we really need. After all, the more cover we buy, the bigger premiums we pay.

So how to figure out how much is right for us?

Take life insurance, for example. I came across one site that made it simple. Just add together your debts, throw in $200,000 for each kid you want to put through uni, add a year’s income for every year until your youngest reaches 18, and top it off with some funeral costs. Voila! There’s your (possibly exaggerated) number.

When I checked this with my insurance adviser, he was not impressed.

“Seriously Tom, how would you feel if I gave you a life cover quote for $1.8 million?” he asked.

Not good! The bespoke plan he created for me called for closer to $524,000, and we ended up knocking it down to even less to fit my circumstances and what I wanted to spend.

Is there a cholesterol bomb in your policy?

Then there are those 30 or so medical questions on the insurance application. If we’re doing them online, we can breeze through them quickly. Yet if not answered properly, they can be like minefields that explode on us at claim time.

For example, the first one typically is “Do you suffer from high cholesterol?” Most people will answer “no” if they’re not on medication. This may be theoretically right, but it may be technically wrong. Run into heart trouble down the line, and our claim could get turned down.

The question perhaps should be: “Did your doctor ever ask you to exercise and change your diet to bring down your cholesterol?” The correct response for many would be “yes”, with an explanation that their doctor recommended diet and exercise.

This might lead to the insurance company requiring a blood test, which may be inconvenient at first. But this will make it more certain that a claim is paid out in the future.

Insurance advisers as minesweepers

One way of making sure a policy works for us is to take advice. There’s really no substitute for an expert view, especially in the complex world of insurance.

As an experienced adviser put it to me, think of an insurance adviser as a potential minesweeper, whose job it is to make sure nothing explodes on us down the line. A good one should help us get the right amount of cover for our situation, help us answer all those medical questions properly, and go in to bat for us at claim time if we need them to.

Our other ally is our ability to comparison shop. If you’re buying insurance online, at the very least it helps to look around for competing information on how much insurance is appropriate and weigh up a number of quotes. That helps us make a better-informed decision.

Online algorithms have their place, but like any tool, we need to understand what they were built to do and their limitations. Insurance needs to work for us, after all.