Undercover Economist

Dear Economist,

My girlfriend and I were planning to fly to Frankfurt on a budget airline. We were offered travel insurance, which I didn’t think was worth the £4.95. Still, my girlfriend insisted on both of us taking the insurance. Assuming the chance of surviving a plane crash is negligible, you do not get to enjoy the benefits of the insurance should a disaster happen. Most likely your family will get paid for your death. So the worst-case scenario is that you’re £4.95 poorer and dead; or at best, alive, but still £4.95 poorer. What is the rationality of taking out the insurance?

Farid Daim, Nottingham

Dear Farid,

I sympathise with your reluctance to pay for insurance but I do not follow your reasoning. There is nothing irrational about life insurance per se (although it is an unattractive product to someone with no dependents – or a selfish disposition). Overall, though, life insurance is one of very few types of insurance it is rational to purchase, because it protects against the risk of a dramatic loss. Another is insurance against catastrophic medical expenses, another role for travel insurance; but you may not be bothered about this, as EU citizens get cheap health-care in member countries.

So it seems to me that you purchased “rucksack insurance”. Petty insurance is highly profitable – which is why it is bundled with cheap flights. But it is unnecessary. Over the course of your life you will earn thousands of times the price of your rucksack and contents. It is better to save on premiums and take occasional losses on the chin – you’ll come out well ahead in the long run. I have.

Take heart, though. You saw the bigger picture, and did exactly what your girlfriend told you. Smart move.

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