Insurance Is for Catastrophe
Which risks should you actually pay someone else to carry?
The idea
Insurance is worth buying for losses you could not absorb, and usually poor value for ones you could.
In the real world
Cover for a phone screen against cover for losing your income.
Going deeper
Insurance transfers risk at a price that includes the insurer's costs and margin, so on average it is a losing trade. That is not an argument against it — it is what tells you where it is worth buying.
The test is absorbability. Losses you could cover yourself are ones where paying the margin repeatedly costs more than the losses would. Losses that would be ruinous are where transferring the risk is worth paying above the odds, because the average outcome is not the relevant consideration when one tail of the distribution ends you. Screen protection and income protection sit at opposite ends of that test.
Where it stops applying
Some low-value cover is bundled or mandatory and not separately decidable, and excess levels change the calculation. The test applies to discretionary policies you are choosing to buy.
Why it matters
It gives you a single test for whether a policy is worth its premium.
Try this today
Ask of one policy you hold: could I absorb this loss myself?
Test yourself
Someone insures a £200 phone screen and has no income protection. What has the test been applied backwards to?
Show the answer
The scale of what they could survive. A £200 loss is absorbable, so paying a premium plus the insurer's margin is a losing trade over time. Losing an income for a year is not absorbable, and that is exactly where transferring the risk is worth paying for.
Learn this in the feed Answering from memory, then again days later, is what makes it stick.