Learn / Part 4 · Protecting What You Have

Insurance: What to Protect, What to Absorb

What should you insure, and what should you absorb?

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In brief

Insurance is best for losses that would ruin you, and poor value for small, affordable ones. Premiums are higher than average claims, so use insurance where the protection matters more than the price.

Key ideas

The ruin test

If a loss would cause lasting harm, transfer it. If you can pay it from savings, consider absorbing it.

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Loading is the price of certainty

Premiums include costs and profit, so on average you pay more than you get back.

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Excess is a tool

Raising the excess lowers the premium and moves small losses where they belong.

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Try it

Insure or absorb?

Insurance is best at transferring losses that would ruin you. For small, affordable losses, paying the premium usually costs more than it pays back on average. Test a policy on both measures.

Verdict: Protect itThe loss is bigger than the savings you could use.
Average payout per year: $495.00
Premium is above that by: 82%The “loading”: costs and profit.
Loss compared with your savings: 6.3×
Years of premiums to equal a claim: 28

What this means

The first test is ruin: can you pay for this loss without lasting harm? If not, insure it, even if the policy is poor value on average. The second test is price: if you can absorb it, a high loading suggests keeping the premium.

A higher excess lowers the premium and moves small losses back to you, where they belong.

Open the full page: formula, variables, worked example and cautions →

Red flag

Selling you cover for something trivial, or bundling insurance into a loan without asking.

Ask before you sign

What does this exclude, and in what situations would it refuse to pay?
What commission do you receive?

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Do this week

Run the insure-or-absorb test on your two most expensive policies.

Try it · 10–45 minutes

List your policies with premium, excess and what each protects against.

See it in a life

Cases that bring this chapter to life

Anir & KatiaThe biggest decision of their lives

Connected ideas

Where else this shows up

Chapter 16
What Risk Actually Means
Shares: Expected value · same tool

Pause and reflect

Name one thing you insure that you could absorb, and one that would ruin you that you have not insured.

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Words worth knowing

Insurance: A contract that moves the financial risk of a defined loss to an insurer in return for a premium.
Premium: The price paid for insurance cover.
Excess (deductible): The part of a loss that you pay before an insurer pays the rest. A higher excess lowers the premium.
Loading (insurance): The amount by which a premium exceeds the average claim cost; covers the insurer’s costs and profit.
Expected value: The average outcome of an uncertain event, found by weighting each outcome by its probability.

Full glossary →

← 16. What Risk Actually Means18. Scams, Fraud and Bad Advice →

Companion notes written for this website, based on the topics of Chapter 17. They explain ideas and do not reproduce the book. General information, not personal advice.