Should I insure something or carry the risk myself?

Insurance transfers a risk you cannot bear to someone who can, in exchange for a premium that is, by design, higher on average than the losses. That means insuring small losses is a reliably bad trade, and insuring large ones is a reliably good one. The only genuinely difficult decisions are in the middle, and they are settled by asking what the loss would actually do to you.

Safety

Step by step

1. Ask what happens if the worst occurs and you have no cover.Could you replace it from savings this month without borrowing or going short? If yes, this is a candidate for carrying yourself. If it would mean debt, disruption or losing your home, it is not.
2. Check whether you are already covered.Home contents policies often cover items away from home under a personal possessions extension; some bank accounts include gadget or travel cover; some purchases carry a manufacturer warranty for years. Duplicate cover is common and pays out once at most.
3. Read the excess and the exclusions before the premium.Cover with an excess close to the item's value pays almost nothing. Exclusions for accidental damage, wear, loss rather than theft, or unattended items are where most declined claims come from.
4. Work out what the cover costs over the item's life.Premium times the years you will own it, plus the excess you would pay on a claim, against the cost of simply replacing it. On small items this comparison usually settles the question immediately.
5. Separate the frequent-small from the rare-catastrophic.Frequent small losses are better budgeted for than insured. Rare catastrophic ones are exactly what insurance exists for, and there the premium is worth paying even though you expect never to claim.
6. If you carry the risk, actually carry it.Put the money aside rather than deciding not to insure and doing nothing. Self-insuring means having a fund that could absorb the loss, not simply hoping.
7. Review it when circumstances change.A risk you could absorb comfortably last year may not be one you can absorb now, and vice versa. Cover decisions should be revisited when income, savings or what you own changes materially.

Tips

• A higher voluntary excess is a partial version of this decision — you keep more of the small risk and pay less. Only set an excess you could actually pay tomorrow.
• Where an item is valuable enough to need specifying on a policy, not specifying it is not self-insuring, it is being uninsured on a claim you thought was covered.
• Claiming on a small loss can cost more than it pays once the excess and the effect on future premiums are counted, which is another argument for absorbing small risks deliberately.

Common mistakes

• Insuring small items and under-insuring the house — It is the exact reverse of what insurance is for. Check the contents sum insured and the rebuild figure before buying any add-on cover.
• Deciding not to insure without setting money aside — That is not carrying the risk, it is ignoring it. The decision only works if the money to absorb the loss actually exists.

Questions people ask