Tools / Protect / Chapter 17 · Insurance: What to Protect, What to Absorb

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.

1 · The idea

Expected loss and loading

Multiply the chance of a claim by what the policy would actually pay: that is its average value to you. Loading shows how much more you pay in premium than the policy returns on average, which is how insurers cover costs and profit. The ruin test asks: if this happened, could my savings absorb it?

The formula

Expected payout = probability × (loss − excess) Loading = premium ÷ expected payout − 1

probability: chance of the loss in a year
loss: size of the loss
excess: the part you pay on any claim (deductible)
premium: yearly price of the cover

2 · A worked example

Phone cover: $300.00 loss, 10% chance, $60.00 premium: average payout $25.00, so you pay 140% more than it returns, and the loss is affordable: absorb. Liability or income cover on a $200,000 loss you cannot fund: the loading barely matters, protect.

3 · Now use your own numbers

Change anything. The result updates instantly.

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.

Illustrative, not personal advice. Inspired by Chapter 17 · Insurance: What to Protect, What to Absorb of Money, Explained From the Inside. Your figures stay in this browser. Real products add terms, taxes and conditions that this simple model leaves out.

4 · Take care

What this tool can’t see

Probabilities are estimates; use the best data you can find (insurer, regulator, claims statistics).
Check exclusions: a policy that does not pay when you need it has no value.
Some insurance is compulsory or required by a lender: this tool does not replace those rules.

5 · Go further

Where this fits

See it in a life:

DavidIncome without wealth Anir & KatiaThe biggest decision of their lives

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