You Don't Insure Small Problems.
Insurance is not for inconvenience.
It is for events that could:
- Destroy savings
- Create massive liability
- Permanently destabilize your system
Risk Transfer
Small problems are covered by:
- Cash flow margin
- Emergency fund
Large catastrophic risks are transferred to an insurer.
This is called risk transfer.
You retain manageable risks. You transfer catastrophic ones.
The Two Types of Risk
1) High Probability, Low Cost
- Minor car repair
- Small medical bill
- Replacing a phone
These are handled by cash flow and your emergency fund.
2) Low Probability, High Cost
- Major medical event
- Severe car accident liability
- Fire destroying belongings
- Lawsuit
These are system-threatening. These are what insurance exists for.