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Inspired by another question, what factors should generally be considered when deciding whether or not to insure yourself against events with a financial impact?

The linked answer makes mention of any cost that would bankrupt me, while a comment considers this too restrictive, opting instead for any "large unpredictable" costs. What exactly are the things I should consider, in general, when deciding whether or not to get insurance for a given event? Is there a general formula I can apply to the myriad of insurance plans that are available?

This question concerns optional insurance schemes, answers would preferably focus on the financial reasons pro/contra.

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    Cars should be insured, because while the cost of replacing your car might not bankrupt you, car insurance normally covers 3rd party Property (and depending on country also medical). If for some reason (slippry road whatever) you drive through say someones shed, you could easily do more damage than your car is worth. If you are not automatically covered for 3rd party medical, then if you insure someone, it could be orders of magnitude more worth than your car.
    – Frames Catherine White
    Commented Jul 9, 2014 at 12:34
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    @LyndonWhite particularly when insurance is required by law.
    – JAB
    Commented Aug 28, 2017 at 17:46

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As for a formula, there isn't a simple one that you can apply to every type insurance. I'll try my best for a simple answer.

Is the event devastating enough to change your lifestyle (looking at life necessities, not wants and nice to haves)? Is the event very likely to happen? Do you have enough emergency funds to cover such an event? Once that emergency fund is utilized, how long does it take you to restore that fund to be ready for the next event?

If the event is devastating enough and is very likely to happen and you do not have the cash to cover the event, and/or it would take too long to restore that emergency fund, then it makes sense to consider insurance. Then you would have to examine if the benefit(s) outweight cost of the premium paid for the insurance. If it is pennies of premium for a dollar of benefit, then it makes sense.

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    If the event is very likely to happen, you'll either find no insurance or the premiums will be extremely high. The best strategy in such a case would be to work on reducing or avoiding the risk.
    – Michael Borgwardt
    Commented Nov 25, 2014 at 13:59
  • Another thing to consider is the deductible and max coverage (ok, technically two things, but considered in tandem). I turned down earthquake insurance (inside/belongings only—HOA has structure covered) because it had a deductible of $30k, and max coverage of $5k... the damage between $30k and $35k for like $100/yr? Just not worth it.
    – Kevin
    Commented Aug 28, 2017 at 18:48
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This answer should be taken as a counterpoint to Thevin S's excellent answer.

I have comprehensive insurance on my vehicle. That is, if I crashed it and wrote it off, my insurance would cover the replacement costs. Now, if this happened, I would be able to deal with the replacement costs myself, even without insurance. It would not significantly impact my lifestyle and would not put my emergency funds at risk, though obviously I wouldn't be happy about this.

As the insurance company is planning on making money off of me, it's clearly not in my financial best interests to carry this insurance. Statistically speaking, it's a cost to me, and a profit for the insurance company.

So why do I do it? Because I find it easy to pay a small amount of money every month for the peace of mind that, if I crash my car, I will not have to cover the large expense. I am (perhaps irrationally) risk averse. I'm happier paying a small amount of money in exchange for a guarantee that I will not have to pay a large amount of money. I mitigate a potentially larger cost, albeit with low likelihood, for the certainty of a smaller cost (my monthly insurance payments).

This is separate from the mandatory PL/PD (public liability, public damage) insurance that I am required to cover. That insurance fits into Thevin's definition of a devastating event.

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  • aka - When you cannot sustain the loss without hardship.
    – mckenzm
    Commented Mar 5, 2019 at 1:54

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