Every aspect of our lives contains some element of risk, be it our work, personal or family life. Some of these risks may be insurable, others may not.
Insurance can be prudent in certain circumstances, but unnecessary in others. The two key things to ask yourself are what your attitude is towards risk, and how you would be able to cope without the insurance.
Let’s start with the first of those attitude towards risk, and let’s also ignore any insurances that you need to have by law (such as motor insurance) as well as any you may need to have under the terms of a contract (such as home insurance where you have mortgage on your home).
There is no right or wrong answer as to whether or not insurance is prudent it depends largely on the individual. Some may barely worry about potential problems which might keep others awake at night.
Two important aspects of risk are frequency and severity. The frequency relates to the likelihood of something to happen. For example, suffering storm damage to your home, or having your car vandalised might be considered by insurers to be relatively high in frequency (as they happen to many people regularly) but relatively low in severity, as they could be quickly, cheaply and easily fixed.
Certain other risks might happen less frequently and therefore be less likely to happen to you, but the consequences could be much more serious. For example, a self-employed consultant might consider liability insurance in case a client should try to take legal action against them. The likelihood of this happening is extremely small, but should it happen, the consultant could lose everything they own in extreme circumstances.
High frequency events are relatively predictable and often don’t get insured. For example, retailers rarely insure for petty thefts below a certain amount. Instead they have insurance with a high “deductible”, meaning that the first amount of any claim is paid for by them, so only large one-off claims of a serious nature such as a robbery or a flood, would result in a claim. To insure any risk, an insurer would want enough to cover the claims, plus extra money for profit, so the retailer would be better off managing the smaller risks themselves.
So, having looked at your attitude towards a particular risk, you now need to look at the likely consequences of an incident and decide whether or not you feel the need to insure against it, or would prefer to manage the risk yourself.
To go back to the example of the self-employed management consultant, the consequences of legal action against you from a client would be huge possibly resulting in the loss of all of your personal assets. If affordable insurance were available, this would clearly be prudent to take out.
The loss of your home would also be a very severe loss, and most people would probably choose to insure their home, even if they didn’t have a mortgage on it, as they simply could not afford to replace their home without insurance.
Certain other insurances might not prove necessary if you have the funds in place to effectively “self insure”. For example, if you wanted to protect your payments on a loan or mortgage in the event of unemployment, you should study the policy very carefully.
If you are in good health and have been in constant employment for many years, you might feel that the chances of becoming suddenly and unexpectedly unemployed are pretty low. If you also had ready access to a savings account and maybe had a couple of months’ salary on hand in case of an emergency, suddenly this type of insurance might seem unnecessary. You may feel that at worst, you could find some alternative employment easily, within say a couple of months, and therefore feel that insurance won’t really make that much difference, and you’d be better off putting what you would have paid in premiums into a savings account instead.
If you have no savings, and have most or all of your monthly income allocated towards expenses as soon as you receive it however, you will more than likely view insurance very differently.
It is really important to get the full facts on any insurance being offered, to know exactly how much protection it gives you, so ask plenty of questions, especially about the limitations and exclusions of a policy. Equally important is the need to assess your broader financial situation, to decide how you might cope without insurance if the worst should happen.
Ultimately, only you can decide whether the purchase of insurance is prudent or excessively cautious, but the ideas mentioned here should help you to decide.