Insurance You Need, Insurance You Do Not, and How to Tell

Insurance is the transfer of a risk you cannot afford to an institution that can. Applied consistently, that definition sorts almost every policy on the market into keep or cancel.

The test

Ask two questions about the event being insured.

1. How likely is it?
2. If it happened tomorrow with no insurance, would it be financially catastrophic or merely annoying?

Insure catastrophic. Self-insure annoying, by holding cash instead of paying premiums.

Usually worth having

• Buildings insurance if you own property. Often mandatory with a mortgage, and rebuilding a home is the definition of catastrophic.
• Health insurance in countries without comprehensive public coverage. Medical bills are a leading cause of household bankruptcy where they are privately borne.
• Life insurance if someone depends on your income. Term life, not whole life, for most people. It is cheap, simple, and does the job.
• Income protection or disability cover. Statistically far more likely than death during working years, and frequently overlooked.
• Third-party liability, usually bundled into home or motor policies. Rare, but the sums involved are unlimited in some jurisdictions.
• Motor insurance to the legally required level, at minimum.

Usually not worth having

• Extended warranties and appliance cover plans. The expected cost is lower than the premiums, which is why they are sold so hard at the till.
• Mobile phone insurance, unless the phone represents a serious portion of your savings.
• Credit card payment protection add-ons, which frequently duplicate cover you have.
• Travel insurance bought at the airport, when your credit card, home policy or packaged bank account may already include it. Check before buying twice.
• Small-item cover for things you could replace from your emergency fund without stress.

Reduce cost without reducing protection

1. Raise the excess or deductible. Higher excess means lower premiums, and if you hold a cash buffer you can carry that first slice of risk yourself.
2. Shop at every renewal. Loyalty pricing is real. Existing customers are routinely quoted more than new ones for the same policy.
3. Bundle only when it is genuinely cheaper. Sometimes it is; often the bundle discount is smaller than the gap between two separate best-buy policies.
4. Answer questions accurately. A cheap policy that is void at claim time cost you everything you paid for it.

Review after every life change

Marriage, children, a mortgage, a business, a health diagnosis or a substantial rise in income all change what would be catastrophic for you. Diarise a fifteen-minute review each year and after any of those events, and cancel anything that has drifted into the annoying-but-affordable category.