Insure the unbearable

Insurance is especially useful where an event is unlikely but its consequences cannot be paid for calmly.

A house fire, heavy liability towards a third party or large medical bills in some systems can wipe out years of savings. Transferring part of the risk to an insurer then makes sense.

Small and frequent expenses are often cheaper to pay for yourself. Otherwise their cost gains an administrative layer, a commission and the insurer’s profit.

This is not a universal rule. Compulsory insurance can spread risk across society. A service contract can be worthwhile for someone to whom predictable spending matters.

Before buying you should check:

• what exactly is covered;
• what the exclusions are;
• the size of the deductible;
• the payout limit;
• the waiting period;
• how damage has to be proved;
• the insurer’s reputation;
• whether you could pay for the event yourself.

What is worth insuring is not the object but the consequences of losing it.

A phone can be replaced. The data, the work and access to accounts can be worth considerably more than the phone itself.

Insurance must not create the illusion that the risk has gone. It only changes how its financial part is distributed.

The test is simple: name the sum whose loss you could survive in a single day without changing anything in your life. Anything below that is usually cheaper to pay for yourself — for a small risk you pay a premium from which the insurer’s costs and profit will also be deducted. Anything above it is what insurance is for. In practice people do the opposite: they buy an extended warranty on headphones and never arrange liability cover for the neighbours below, because headphones are comprehensible and sit in a pocket, while neighbours are hypothetical until the first burst hose.

It helps to see a policy as buying not money but a certain amount of peace of mind — and to know in advance where that peace ends. The exclusions and the deductible get read exactly once: either before signing or after the event.