Eli5: If an insurance company is willing to sell you insurance, does that mean the insurance company is expecting to make profit and therefore you will make a loss and should not take up insurance?
In: Economics
The short answer to your question is yes. Don’t buy insurance for anything you can afford to replace. The longer answer is that it’s complicated, and in some cases insurance does make sense.
The biggest benefit of insurance comes primarily from situations that *probably* won’t happen but will *definitely* bankrupt you if you do. Think of, say, your house. Most people never have their house burn down, or blow up from a gas leak, or get buried in a mudslide, or anything else like that. But for those very unlucky people who do, they’re now suddenly homeless and likely have almost nothing left. Insurance will (hopefully) step in to give them the money they need to rebuild their lives.
Because most houses don’t burn down, the insurance premiums you pay will end up costing you far less than a replacement house would. Most people who buy house insurance end up losing a couple tens of thousands of dollars to the insurance company (which sounds like a lot but isn’t really all that much money over the course of your lifetime), but in exchange they have the security of knowing that if they’re one of the unlucky ones that does lose their house, they’ll get the money to replace it.
When it comes to small things that break often (like, say, smartphones), insurance stops making sense. If most phones break and need to be replaced within 5 years, the only way the insurance company can make a profit is if they charge everyone more than the cost of a replacement phone over those five years. The only time I’d suggest buying smartphone insurance is if A) you’d lose your job or something equally disastrous without your phone, and B) you’re a clumsy person and you know you’re going to break it far more often than the average person.
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