Personal Finance · Explainer
Which insurance is worth buying, and which is noise
Insurance is for losses you could not absorb. Judged that way, most add-ons at the checkout fail the test.
The short answer
- Insure catastrophic, low-probability losses; self-insure small, frequent ones.
- Income protection and liability cover are routinely under-bought.
- Extended warranties and single-item add-ons are routinely over-bought.
Insurance transfers risk at a price that must, on average, exceed the expected loss — otherwise no insurer would write it. Buying it is therefore rational only when the loss would be unmanageable, not when it would merely be annoying.
The tests
- Could this loss materially damage your finances if it happened tomorrow?
- Is the probability low enough that the premium stays affordable?
- Is the cover you are quoted actually the cover that pays in your scenario?
Commonly under-bought
Cover against loss of income — through illness or disability — protects the asset that funds everything else, yet it is frequently absent. Personal liability, often bundled into home policies, similarly protects against claims that can dwarf any single possession.
Commonly over-bought
Extended warranties, screen cover on a single device and travel add-ons duplicated by an existing card or home policy all insure losses the household could absorb. Duplicated cover does not pay twice.
Sources
- Insurance consumer information — NAIC
- Insurance guidance — MoneyHelper (UK)
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