Cash Back Bonus or Lower Premiums - Which is Better

The world of insurance can be rather confusing if you don’t know the terminology. Do you know the difference between a cash back bonus and a no- claim bonus; or is it one and the same thing? Arm yourself with knowledge and you can negotiate lower insurance premiums from a position of strength.

What is a No-Claim Bonus?

The secret is…it’s actually not a bonus at all – you are not going to receive money when your insurer offers you a no-claim bonus. A no-claim bonus is a discount on your premiums. Insurance is about risk, the higher the risk you pose to the insurance company, the higher your premium will be. When you have made no claims for a period of a year, you did not cost the insurance company money, you posed a lower risk and they reward you for that by lowering your premium. This is called a no-claim bonus.

A no-claim bonus is calculated on the number of years that you had insurance cover but did not claim. With car insurance the system is only applicable if you take out comprehensive insurance on your car; it can also apply to house content insurance policies. The no-claim bonus is calculated as a percentage of your premiums and the more claim-free years you have, the bigger your reduction in premiums will be.

So, what then is a cash back bonus?

If you do not claim for a number of years, anything from two to four years depending on the insurance company, you will receive a cash back bonus. Most insurance companies now work on a four year period. Every insurer has his own formula, some will pay you back your first-year’s premiums, others work on a percentage of total premiums paid.

The bonus is only paid if you made no claims for the laid-down number of years. Again insurance companies differ; some will exclude certain claims from affecting your cash back bonus, other’s may not. Claims that could be excluded are:

  1. If your car was stolen and was fitted with a tracking device approved by the insurer.
  2. Car windscreen chips.
  3. Garden furniture stolen from your garden.
  4. Fraudulent use of your bank cards.
  5. Third party medical expense claims after being injured by a defect in your home, or by your animals.

We must re-iterate that these are examples and you must confirm the rules of your insurer to make sure what you qualify for and what, if anything, is excluded.

Now, which one is better?

The risk you run with a cash back bonus can be illustrated as follows: You have no claims for two years but in the third year an accident takes place or you have a robbery at your home – you are now disqualified from the entire bonus as you have to make a claim. Should the same thing happen and you had a no-claim bonus system, you would have at least enjoyed the lower premiums for two years.

With a no-claim bonus once you have claimed your premiums will increase at the next renewal rate as you now fall into a higher risk group. It is calculated in levels, so you don’t go right back to zero if you had a number of claim-free years before the claim incident. With cash back bonus you loose the entire bonus and have to start from scratch.

Your no-claim bonus is transferred from one insurer to the next should you move your insurance. The new insurer may ask you to obtain a no-claim bonus certificate from the previous insurer as proof. With the cash back bonus the benefits are not transferable if you change insurance.

A cash back bonus can be a considerable amount, depending on your monthly premiums – a year’s premiums back could pay for a nice holiday. The risk is you don’t have a crystal ball to know for sure that you would not make any claims for the next three to four years. After all, that’s why you took out insurance in the first place. Also, remember that are other ways in which to reduce your monthly premiums as well, have a look at our other articles for some tips in this regard.

Cash back bonus or lower premiums – which one is the better option? You will have to be the judge, no-one knows your circumstances better than you. Just make sure that you are well informed and compare apples to apples when making the decision.