How to buy (and not to buy) insurance

The insurance business is either the best or the worst depending on what side of the transaction you're on.

As the insurance company you get to carefully select your customers on your terms according to risk, and then collect gobs of premiums you can invest not only to pay out claims later, but also to turn a profit. It’s a big reason why Warren Buffet’s portfolio is rife with insurance businesses and he’s outlined the merits in prior annual letters to shareholders.

As the consumer it’s the worst. No matter what it’s always a losing game. Pay steep premiums and never file a claim, and all that cash is just sunk cost. File a claim and the insurance company jacks up your premiums so you end up paying back the cost of the claim in the long term. Or the company drops you all together if you file too many claims – and they share data so it can be impossible to get new coverage anywhere.

We see insurance as something that should only be purchased to avoid unsustainable losses or to avoid a gut wrenching decision.

If you can afford it

For example, if you could afford to replace your car, you’re better off buying liability but passing on comprehensive. As much as it would suck to have your car stolen or destroyed, the odds are so slim that if it ever happened you’re better off self-insuring and buying a replacement out-of-pocket. For car insurance we recommend Metromile, not only for city dwellers, but also anyone who drives fewer than 200 miles per day. We switched to Metromile for our two cars and saved 79 percent.

Saving Fido

As another example, when a pet needs a life-saving $3,000 procedure, for many people this leads to an impossible decision. Picking up pet insurance when they’re young and have no preexisting conditions can be a relatively cheap peace of mind. We signed up our toy poodle, Daisy, for insurance with Healthy Paws when she was two months old and given all the procedures and medications she’s needed, we’re grateful we did.