Insurance is not an investment, and treating it as one is expensive

This is written to be used rather than admired. Each section below is a decision about insurance, and each one has a default.

The test is whether you could absorb the loss

Insurance transfers risk at a cost, and the insurer prices that cost to make a profit on average. It follows that, on average, buying insurance is a losing proposition — which is fine, because you are not buying an average outcome.

You are buying protection against the outcomes that would be ruinous, and only those are worth the transfer. Insuring a loss you could pay for out of savings is buying something you do not need at a price designed to be profitable.

Excess is the lever most people ignore

Raising the voluntary excess lowers the premium, often substantially, and shifts small claims back to you. Since you would generally not claim for a small amount anyway — because of the effect on future premiums — this is frequently free money.

On the balance sheet, the correct excess is roughly the largest amount you could pay without difficulty. Check whether the quoted figure is the voluntary excess alone, because a compulsory excess set by the insurer is normally added on top of it, and specific risks such as escape of water, subsidence or a young driver often carry a separate and much larger one.

The worst value is sold at the point of sale

Extended warranties, gadget cover and payment protection sold alongside a purchase are consistently poor value and often duplicate existing cover. They are sold at the moment of commitment, by somebody earning commission, with no comparison available. Checking whether a card, a home policy or statutory consumer rights already cover it usually makes the purchase unnecessary.

In many countries a statutory right to goods that last a reasonable time already sits behind the sale and runs against the retailer whether or not a warranty was bought, which is precisely the protection the warranty is sold to make you doubt.

What is usually worth having

Cover for events that would remove your income or your home is the category that survives the test for most households. Liability cover is cheap relative to the size of the loss it protects against, which is why it is often compulsory.

Health cover depends heavily on the system you live in and is not comparable across countries. Cover already provided through an employer or a state scheme reduces what you need to buy, but it usually ends when the job does and it is rarely portable, so an identical policy held personally behaves very differently in the year you most need it.

Read the exclusions, not the summary

Policies are priced on their exclusions, and two policies with identical headline cover can differ enormously in what they pay. Pre-existing conditions, wear and tear, unoccupied property and undeclared use are the exclusions that most often produce declined claims. Non-disclosure is the other main cause, and it is generally avoidable by answering questions carefully and keeping the insurer updated.

The definitions section does as much work as the exclusions, because what counts as an accident, as forced entry, as unable to work or as a pre-existing condition settles most disputed claims, and those words rarely mean in a policy what they mean in conversation.

This is general information, not advice about your particular position.

Underinsurance is discovered at the claim

Where a sum insured is set too low, many policies scale the payout down in proportion rather than paying a smaller claim in full, so even a partial loss is cut. Rebuild cost on a home is not its market value and moves with construction prices rather than property prices, and a contents total set years ago rarely survives an honest room-by-room count. A renewal quote is produced by the insurer's pricing model rather than by your risk alone, which makes the renewal invitation a price to test rather than a number to accept.

For most households, how insurers may price renewals is regulated differently from country to country, and in some markets the rules were changed specifically because staying put was costing customers money.

The takeaway

Insure the catastrophe, carry the inconvenience, and raise the excess.

Costs compound as reliably as returns do, and in the same direction.