Which insurance you really need
Most people are over insured and under insured at the same time. They pay for phone and glasses cover but have no liability insurance. What matters is whatever could ruin you financially.
The basic rule is already in the lesson Insurance before wealth. Insure what could ruin you. Carry yourself what you could pay from your emergency fund. This page turns that into a concrete list.
What almost everyone needs
Health insurance. In Germany, Switzerland and the Netherlands it's compulsory, in many other European countries you're covered by the state system. You mainly need to act when you become self employed or move abroad.
Personal liability insurance. It pays when you accidentally cause damage to someone else and usually costs only a few euros a month. Hardly any other policy protects so much for so little. More on the liability insurance page.
Travel health insurance as soon as you travel. It often costs only 10 to 20 euros a year and covers what your normal insurance won't pay abroad, such as being flown home.
What depends on your situation
Protecting your ability to work. If you live on your income, your ability to earn is usually the most valuable thing you own. Income protection or disability insurance is therefore important for most people in work. More on the income protection page.
Term life insurance if others depend on your income, such as children or a partner with a shared mortgage. It pays a fixed sum if you die and is surprisingly cheap without a savings element. If nobody depends on you, you don't need it.
Motor liability insurance if you have a car. It's compulsory throughout the EU.
Buildings insurance if you own a house. A burnt down house without insurance and with a mortgage still on it is one of the worst financial situations there is.
Contents insurance pays off if your belongings are worth a lot. For a shared flat with second hand furniture it's more of an optional extra.
What you usually don't need
This is where the seller earns most. Typical examples are insurance for phones, glasses or luggage, extended warranties at the electronics store, payment protection insurance on loans and funeral plans. The losses are either small enough to pay yourself, or the terms exclude so much that little is left when you need it.
Tom pays 9 euros a month to insure his phone, plus a 100 euro excess if he claims. Over two years that's 216 euros in premiums. If he puts the money aside instead, he has a cushion for a repair, and if nothing breaks, it's still his.
Be careful with anything that combines insurance and investing in one contract, such as endowment policies or unit linked pension plans with high upfront costs. Keeping the two apart is almost always cheaper and more flexible.
After signing you usually have 14 days to cancel without giving a reason, and 30 days for life insurance in Germany. The period only starts once you have all the contract documents. That gives you room if you were talked into something at a sales meeting.
With many policies it's worth looking at the excess. If you carry small losses yourself, the premium is often much lower. That fits the basic rule: insurance for the big losses, emergency fund for the small ones.
Accident insurance is a special case. It only pays after an accident, but most cases of being unable to work come from illness, above all mental health problems and back and joint conditions. So it's a poor substitute for income protection.
Insurance is sold very differently across Europe. In France personal liability cover is often already part of home contents insurance, in Belgium family liability cover is simply called “familiale”. What the state covers in case of illness or disability also varies a lot. So first check what you already have through your employer and social security before buying more.
Once a year it's worth a quick look at your policies. Do they still fit your life? After a move, marriage, a child or a new job, what you need often changes.
Summary
- Insure what could ruin you, and pay small things yourself.
- Liability, health insurance and, if you work, your earning ability come first.
- Phone, glasses, luggage cover and extended warranties are usually not needed.
- Keep insurance and investing in separate contracts.
Did you get it?
What rule decides whether insurance is worth it?
Insure losses that could ruin you financially. Small losses are better paid from your emergency fund.
When do you need term life insurance?
When other people depend on your income, such as children or a partner with a shared loan.
Why is phone insurance usually a bad deal?
Because two years of premiums often cost more than a repair, and there's an excess on top if you claim.
How long can you usually cancel a new insurance contract?
14 days, and 30 days for life insurance in Germany, counted from when you received all the documents.
Sources and further reading
- EIOPA, consumer protection information. View source ↗
- Verbraucherzentrale, which insurance matters (German). View source ↗
- BaFin, insurance for consumers (German). View source ↗
- German Insurance Contract Act, § 8 and § 152 (right of withdrawal, German). View source ↗
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