Which risks to transfer and which to carry

Most households make two opposite errors at the same time.

They are over-insured on the small things — extended warranties, cover on devices, low excesses on everything, three policies that overlap — and under-insured on the two or three events that would actually end the position.

Both errors come from the same place: cover is bought when it is offered rather than when it is needed, and it is offered at the till.

The four questions for any existing policy

What event does this actually pay on? Not the name of the policy. The conditions under which money arrives, and the list of situations where it does not.

What would that event cost me if it were uncovered? In money, and in months. If the answer is a number the reserve can absorb, the policy is buying convenience.

Is this event already covered somewhere else? Overlap is common and it pays once. Two policies covering the same loss produce one payment and two premiums.

Would I buy this today, at this price, knowing what I now hold? The most useful of the four, because it defeats the default that keeps everything in place.

What would you do

A household holds about 90,000 in reachable assets, spends roughly 3,000 a month, and has two incomes of similar size in unrelated fields. No children. Total premiums currently run to about 2,400 a year.

The policies are: cover on two devices, an extended warranty on an appliance, a low-excess policy on the contents of the home, cover on the building, and a small policy that would pay a lump sum if either earner died.

Optimising for

Removing the outcomes that would set the household back by years, at the lowest total annual premium.

You cannot know

• Which of the five, if any, will ever be claimed on
• What each policy excludes, which nobody has read since the first year
• Whether the building cover would actually rebuild at today's costs
• How the household would cope with one income for two years

Choose an option

Keep everything. The premiums are affordable and cancelling feels like tempting fate.Drop the device cover and the warranty, raise the contents excess, keep the building cover and check its rebuild figure.Cancel everything, including the building cover, and hold the premiums as extra reserve.Keep everything and add cover for long-term inability to work.

The gap with no product attached

Some of the largest exposures do not arrive as an offer. Nobody sells you cover at the till for the two-year income interruption, the parent who needs care, or the relationship that ends.

These get carried by default, which means they get carried without being sized.

What would you do

The same household, one year later. Both earn roughly 40,000. Fixed commitments are about 2,000 a month; total spending about 3,000.

Cover for a long-term inability to work is available at about 700 a year and would pay a portion of one income after a waiting period of six months. Reachable assets are now 100,000.

Optimising for

Making a two-year loss of one income survivable, using either a transfer or a reserve, at the lowest cost in money and flexibility.

You cannot know

• What the policy excludes, and how contested a claim would be
• Whether the remaining earner could increase hours, and by how much
• How long a return to work would actually take after a long absence
• Whether the insurer will still be offering this in fifteen years, and at what price

Choose an option

Take the cover, and treat the six-month waiting period as the reserve's job.Skip the cover and hold a larger reserve instead.Take cover for both earners, doubling the premium.Do nothing for now and revisit if either income becomes the only one.

Check

What should trigger a review of existing cover?

Choose one answer

A material change in what the household could absorb, or in what a covered item would cost to replaceThe renewal letter arrivingA claim being madeA cheaper quote appearing

Check answer

Worth remembering

• Most households are over-insured on small losses and under-insured on the two or three that would end the position.
• The boundary between transfer and carry moves as assets grow, and nothing announces the move.
• The four questions for any policy: what event pays, what it would cost uncovered, whether it overlaps, and whether you would buy it today.
• Some of the largest exposures have no product attached, so they get carried without ever being sized.
• Splitting a risk by duration — reserve for the short phase, transfer for the long one — is the general answer where both exist.