Lesson 8 of 10 · 7 min read
Insurance: which ones you actually need
Insure what you can't afford to pay for, and nothing else.
The only question that counts
Insurance is by definition a bad deal on average: the insurer charges your premium plus their costs plus their profit, so across many people you pay more than you get back. It's still sensible, but only for one kind of risk: the kind you can't financially carry yourself. So the question is never how likely something is, but how bad it is if it happens. A six hundred euro phone you can replace yourself. Long-term disability you cannot absorb.
What you need in almost every case
Liability, because the damage you cause to someone else can be enormous and the premium is small. Health cover, however it's arranged where you live: uncovered medical costs are, in every system, exactly the kind of risk that can break a household. Contents and buildings insurance if you own a home, because that's your largest asset. And if you earn the income others depend on, life cover and disability cover. Those last two are unpleasant to think about, which is exactly why almost everyone skips them.
What you usually don't need
Insurance on individual gadgets, funeral policies if you already have a buffer, extended warranties at the till, travel cover your credit card already provides, and anything sold as a 'package' with things in it you'll never use. The rule of thumb: if you can pay the damage out of your buffer without your life changing, don't insure it. That's exactly what a buffer buys you besides peace of mind — it makes a whole row of policies unnecessary.
Stocky says
Raise your excess where you can. Your premium drops, and the damage you then carry yourself is precisely what the buffer is for.
Investing and insuring don't belong in one product
Products that combine saving or investing with insurance sound efficient and rarely are. You pay costs for two things at once, the costs are hard to compare, and switching is expensive or impossible. You're almost always better off with the two separate: a cheap term policy for the cover, and a broad ETF for the wealth. If an adviser says the combined product is better, ask what they earn on it. That answer is usually the whole answer.
Remember this
- Only insure what you can't financially carry yourself.
- Liability, health, home, and income on death or disability.
- If you can pay it from your buffer, don't insure it.
- Keep investing and insuring separate; combined products charge twice.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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