Not all insurance cost is transparent, if you are very careful, you forgo good opportunities.
Insurances are a necessary evil of the middle-aged person’s lifestyle. You are old enough to know that you may need it and too young to skip over it.
What insurances are necessary
Insurance should protect us from a negative outcome, like losing our health or having an expensive lawsuit.
BANG!
You just dropped your phone. While you scramble to the flow, you hope the screen is not broken.
Better buy the insurance and never care again!
On the other side, insurance comes with a cost. Money that you could have spent elsewhere. And unless you are filthy rich, you probably do care. And dirty rich people do not need insurance anyway.
There is no unique strategy to decide whether you need insurance.
A strategy to decide on insurance
What can help is the fourfold pattern. An Eisenhower matrix-like pattern of gains/losses and high/low certainty.
| Certainty | Gain | Loss |
|---|---|---|
| certain | Risk-averse | Hope |
| uncertain | Gamble | Insurance |
Suppose you face a potential loss. Think about the probability of the event. How likely is it that you will drop your phone?
Very high? Then factor in the insurance cost to your phone price.
But let’s make things more complicated. Some insurance contracts do not pay in all cases. How likely are these cases to occur? Likely, then hope for the best. You will waste your money on insurance.
This category also applies to cases where no insurance can be bought or is too expensive. Many businesses on the downward path hope to reverse the trend and rise again.
Not all insurance cost is transparent
When there is something to gain, we do not need insurance. Many situations in life are uncertain. Sometimes we lose, and sometimes we win. This is called a gamble.
And sometimes we always win, in any case. There is usually the option to take a save small win and an unsafe big win. Deciding on the potential big win is a gamble.
Take, for example, your latest work project. You probably settled for something less than the maximum solution for the next milestone. This safe decision could have been driven by fear of facing your boss with empty hands if you can not deliver the big solution.
The insurance premium you pay is the value difference between the small and big solutions. In this case, your company paid. But you also paid because the win did not deliver into your account.
You might be overinsured if you are risk-averse and always refuse the gamble.
If you want to know more about the fourfold pattern, check out this article.