Insure Only What You Can't Afford to Lose

Insure the loss you cannot afford; carry the one you can. (One rule that does most of the work.)

Every risk sits somewhere on two scales: how likely it is, and how badly it would hurt. The common mistake is to insure by likelihood — we cover the things that feel likely, such as a cracked phone screen, and skip the things that would actually break us, such as a long illness that stops our income.

The right axis is size, not odds. A loss you could pay from savings without changing your life is a loss to keep. A loss that would wipe out years of saving, force a house sale, or sink your family is a loss to transfer.

This is why a healthy working adult should care far more about disability and critical-illness cover than about insuring a mobile phone. The phone is annoying to replace; the lost income is ruinous.

Rare-but-ruinous beats common-but-trivial every time. Premiums spent on small, likely losses are premiums no longer available for the big, rare ones that are the whole point of insurance.

Illustrative example: sort risks by how much they would hurt

The grid plots each risk by how likely it is and how much it would hurt. Insurance belongs along the top — the high-impact row — whether a risk is common or rare. The easiest corner to neglect is the top-left: events that are unlikely but ruinous, such as long-term disability. They feel remote, so people skip them, which is exactly the error the rule is meant to prevent.