The "Philosophy" of Insurance

Grasp the fundamentals of risk, and you'll never overpay for protection.


Okay, this may sound like a dry topic (the lesson to skip!) but it's not. And it's very important stuff, especially if you're carrying several different types of insurance. That's because insurance has a logic to it, and unless you're following the rules, you're probably paying for coverage you don't need or that isn't worth the price.

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What's the logic of insurance?

You already know it, even if you think you don't. Put most basically, it goes something like this:


A good insurance policy (or policies) should cover as much as possible as efficiently as possible.


But to make it even easier on you, we'll boil the philosophy down to three basic rules. You can think of these rules as "insurance tests", and if your policy (whether it's auto, health, homeowner's insurance, or whatever), passes all of them, it's probably smart coverage to own. We'll lay out our rules first, then we'll break 'em down, one by one.


  • Rule 1: Insure for the same event as few times as possible.
Overlapping coverages are very inefficient, but unfortunately they are also very common. Covering for the same event twice usually doesn't double your coverage (the policies don't "stack" on top of each other), but it can double your cost.

  • Rule 2: Insure for the broadest possible event.
We call this rule the cause-and-result test. Put simply, if you're going to buy protection against a result (like a wrecked car), try buy a policy that covers for that result no matter what causes it. (Or at least for the largest possible range of causes.) Efficient, huh?

  • Rule 3: Keep your coverages consistent.
You wouldn't insure the same object (say valuable jewelry) for theft at $3,000 and for loss at $10,000. It doesn't make sense (and you'd have a hard time finding an insurer to take on that policy). So don't do it with other types of coverage either.


You may be saying to yourself "these 'rules' are completely obvious."

But wait!

You'll be shocked and amazed (okay, maybe not quite) to see how often these rules are broken, even on a seemingly straightforward type of policy like auto insurance. Heck, you may even learn that you're guilty of breaking one or two of the rules yourself!

Let's take a more in-depth look at each rule, and how you can apply it to your own insurance buying decisions.


Next: Lesson 4: The 3 Rules That Can Save You Money on Your Auto Policy.

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