Prudent Insurance

Insurance is a curious product. It’s one of the few things that you buy which you hope never to use – along with fire extinguishers and emergency tires. This makes it hard to value, because you only know how much it’s worth when it’s too late.

Most of us are reluctant to spend money on insurance against risks that are unlikely to happen. But when something goes wrong we’re glad we paid up. This makes it hard to put a establish the worth of insurance, because so often it can feel like pouring money down the drain.

So how do you know when it’s prudent to take out an insurance policy? There are three aspects to consider when making this decision – financial risk, convenience and peace of mind.

Financial Risk

An insurance policy is a way of controlling your costs. By paying a small, certain amount of money you are protected against the possibility of a much larger expense. Deciding whether or not to buy insurance for financial protection depends on your attitude to risk and your personal circumstances.

Let me illustrate this with an example. Last year I hired a car and I paid a damage waiver, an insurance policy that capped the cost of repairing any damage incurred while I had the car. I usually don’t bother with this because I have a good driving record, but last year I was short of cash and knew I could not afford an unexpected bill of perhaps several hundred dollars. As it happened one of the car’s headlamps was smashed by a flying stone and my decision to purchase insurance was vindicated – it saved me money.


There’s more to most insurance policies than simply controlling financial risk. Most policies also offer a relatively convenient solution to fixing problems. If your car or home is damaged by an accident you might not know who to turn to for help. Most insurance companies provide solutions to these problems, providing assistance when you need it most.

Peace of Mind

If you are a natural worrier, always concerned that something bad will happen, then insurance can be extremely valuable. It offers you peace of mind that in the unlikely event of something going wrong you have a certain level of protection. Unfortunately the insurance salesperson can play on your insecurities, insisting that you take insurance against every possible eventuality. But it makes sense to purchase protection for your main areas of concern.

Deciding when insurance is prudent is a highly personal decision. It depends on a wide range of factors, and these can change over time. What’s essential is deciding whether or not the insurance policy offers value for money, in whatever terms you choose to measure it.