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Is it worth protecting your no-claims bonus?

A 2007 Mini CooperBuilding up a no-claims discount (also known as a no-claims bonus) over a number of years is the best way to reduce your car insurance costs.

Many insurers offer a discount of up to 70 per cent for drivers who haven't claimed for more than five years.

Typically, you will be offered the chance to 'protect' your no-claims discount at this stage.

You may be tempted to sign up to ensure that if you have an accident this discount will remain intact.

But given that motorists looking to protect a four-year no-claims discount could face paying as much as £90 on top of the cost of their annual car insurance, is this a benefit worth forking out for?

Beware of the "step back" scale

Let's take the example of having five years no-claims discount, the upper limit of most insurers, unprotected.

You do need to be aware of the "step back" scale if you need to make a claim, as with most insurers, a certain percentage of the discount is lost for each claim.

So if, for example, your insurer offered a maximum no-claims discount of 65 per cent, the first claim might reduce this discount to 50 per cent and the number of no claims years to three, according to financial analysts Defaqto.

A second claim might then reduce the discount to 30 per cent and the years to one.

A third claim might result in no discount being given and the number of years to zero. As a rule of thumb, two years are knocked off for each fault claim.

"The motorist could therefore lose a substantial discount unless they have paid to protect their no-claims discount," says Michael Powell from Defaqto.

"So when a policyholder has reached the maximum discount available, I feel it is advisable to protect it."

This is a view shared by Niki Bolton from insurer Esure.

"Adding a small premium - in the tens of pounds - makes sense if it could stop your no-claims discount being reduced in the event of having to make a claim," she says. 

Charges can vary considerably

However, while the potential premium hikes for those who don't protect their no-claims discount may make paying for protection seem very appealing, the charges levied on drivers can vary considerably.

While it usually costs between 5 and 10 per cent of the total premium, it can range from as little as a few pounds up to as much as £90 a year and higher if the driver has had a recent fault claim.

This means that the cost of the protection could cancel out the saving on your policy - especially if you don't make a claim for a number of years.

You also need to consider the level of protection provided, as insurers have varying limits.

Some will only provide cover for two claims in a five-year period, while others allow two claims in three years or one a year so it's vital to read the small print.

Your premium could still increase

Further, you need to bear in mind that even if you have paid to protect your no-claims discount, this doesn't stop an insurer from reassessing a driver's risk in the event of an accident.

This is regardless of how many years no-claims discount a driver has.

"Many insurers will load premiums if a claim has been made on the policy," says Simon Coughlin of M&S car insurance.

Do your homework

While a no-claims discount can be a valuable asset when it comes to driving down car insurance costs, you need to do your research - and your sums - before you pay to protect it. 

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Esther Shaw

Esther Shaw

Esther Shaw is a regular contributor to Confused.com and is the former deputy money editor at The Independent and Independent on Sunday. Before that, she worked as a money and City reporter on The Daily Express and Sunday Express.
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