Insurance: big losses first

Insurance is a trade: you pay a small, certain amount, the premium, to avoid a big, uncertain loss. To judge an offer, put the premium next to the expected loss — what the loss costs on average.

Expected loss = chance it happens × how much it costs, added up over the time the policy covers.

The phone: one in ten needs a 4,000 UAH repair in a year, so 10% × 4,000 = 400 a year, 800 over the two years the warranty covers. The warranty asks 2,250, about 2.8 times the repairs you can expect.

On average the buyer loses, because the insurer has costs and wants a profit. That is fine when the loss would hurt far more than the premium. It is a bad deal for a loss you could pay yourself — and a 4,000 repair fits easily in the family's 10,000 of savings.

Sort every risk by two questions: how big is the loss, and how often does it happen? Each pair points to a different tool.

• Small and frequent (cold medicine, a bus fare): a line in the monthly plan.
• Small and rare (a 6,000 laptop repair): pay from the cushion.
• Big and rare (a lost income, flooding the neighbours): this is what insurance is for.
• Big and frequent (phones stolen on the metro again and again): change the habit first — a policy would cost about as much as the loss.

What counts as "big"? A loss you can't cover from savings without new debt or months of hardship. With 10,000 saved and 56,000 a month coming in, a broken laptop isn't big. A lost income is. Insurance earns its keep only in the big-and-rare box; everywhere else a plan or a cushion is cheaper.

Term life insurance pays the family a sum if the insured person dies within a set term. Its job is to replace the income the family would lose, so size it by that income, not by a round-sounding number.

A simple way:

cover = income to replace × 12 × years the family needs + debts − savings

Sam earns 31,000 a month and the family picked five years — time to rearrange home, work and childcare: 31,000 × 12 × 5 − 10,000 = 1,850,000 UAH (leaving debts aside here).

Two things people get wrong. First, both earners matter: a smaller salary is still a loss, so Sam's wife on 25,000 needs cover too (25,000 × 12 × 5 − 10,000 = 1,490,000). Second, a job loss or seasonal gap isn't death and isn't covered by a life policy — that is the cushion's job.

The deductible is the part of each loss you pay yourself before the insurer pays the rest. A higher deductible means a lower premium, because you carry more of the risk.

To pick between two quotes, weigh the yearly premium you save against the extra deductible you'd pay per claim:

break-even = extra deductible ÷ premium saved per year

The home policy: 1,500 with a 3,000 deductible, or 2,100 with 500. The cheaper one saves 600 a year and carries 2,500 more deductible. 2,500 / 600 ≈ 4.17, so it wins unless you claim more often than about once in four years — and 3,000 fits in the cushion.

Rule of thumb: choose the highest deductible your cushion can absorb without stress. The premium you save every year usually beats the larger bill you pay rarely.

Some policies promise life cover and a lump sum back later — "return of premium", savings-plus-insurance. They bundle two jobs and usually do both worse.

• Less cover for the money. Part of each payment feeds the saving pot, so the same budget buys a smaller death benefit than a plain term policy.
• A return you can't compare. Fees are baked in and hard to see, so you rarely know the real rate. Getting your own premiums back in 15 years also means inflation has eaten part of their value.

Do each job where it's cheapest: a plain term policy for the losses you couldn't absorb, and savings somewhere you can see the rate and the fees. The same logic separates insurable risks from a job loss: Sam's work contract is seasonal and can pause, and none of his quotes covers that, so three months of his pay (3 × 31,000 = 93,000) has to come from the cushion, not a policy.