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Insurance is a bet you hope to lose. You pay a known, small amount so that a rare, large loss does not wreck your finances. The insurer expects to collect more in premiums than it pays out across all its customers, which is how it stays in business. So on average, every policy costs more than it returns.
That is fine when the loss would be ruinous. It is a poor deal when the loss would merely be annoying. Almost every insurance decision gets easier with one rule:
Insure the losses you could not absorb. Pay for the rest yourself, out of savings.
Here are five common beliefs tested against it. Rules on what is required, what is covered and how claims work vary a lot by country, so check your local rules and the actual policy wording.
Myth 1: “More cover is always safer”
More cover means more premium. If a policy pays out for a $300 loss you could cover from your emergency fund, you are paying the insurer’s costs and profit to move a small risk you could carry. Spend that premium on big risks instead.
Myth 2: “A low deductible is the smart choice”
The deductible (or excess) is what you pay before the insurer pays. Lower deductibles mean higher premiums. Here is an illustrative comparison:
| Option | Deductible | Annual premium |
|---|---|---|
| A | $250 | $780 |
| B | $1,000 | $600 |
Option B saves $180 a year. If you claim, it costs you $750 more. You come out ahead unless you claim more often than about once every four years. For most people with an emergency fund, the higher deductible wins, and the money saved can go into that fund.
Myth 3: “Extended warranties are good protection”
A $90 warranty on a $400 appliance is insuring something you could replace from savings. The pricing usually reflects how rarely those products fail within the extended period. Treat it as Myth 1 in a different shop. Many products also carry a basic manufacturer or legal guarantee already, so read what you have before buying more.
Myth 4: “I’m young and healthy, so I don’t need income protection”
This is the myth that costs the most. For someone aged 25 to 45, the biggest asset is usually not the house or the pension. It is decades of future earnings. A long illness or injury that stops you working is rare, but its cost is enormous. That is exactly the kind of loss insurance exists for. Check first what your employer or public system already provides, and for how long.
Myth 5: “Life insurance is for everyone”
Life cover pays out when you die, to whoever depends on your income. If nobody does, a single person with no children and no shared mortgage, it may not be needed at all. If a partner or children rely on you, it can be essential. The question is not age. It is who would be in trouble without your earnings.
A one-page insurance review
Once a year, list every policy you hold and answer four questions for each:
- What loss does this protect against, in money terms?
- Could I cover that loss from savings without serious hardship?
- What would a higher deductible save me?
- Is anything large uncovered, such as income, liability or the home?
Usually the result is cancelling one or two small policies and adding cover for one big risk. Total premiums often stay about the same, but the protection is pointed at the losses that would actually hurt.