Resilience: buffers and insurance concepts

Novice level

An emergency buffer is money you can reach quickly for surprises: job loss, repairs, medical costs. It is not for planned spending or investing.

There is no single correct size. A common starting point is to count how many months of essential spending it would cover.

Insurance is a way of sharing risk. Many people pay small amounts so that the few who suffer a large loss can be helped.

Basic level

Buffer months = readily available savings / monthly essential spending.

Insurance terms: premium (what you pay), sum insured or limit (the most it will pay), deductible or excess (what you pay first), exclusions (what is not covered). Read these before buying.

Insurance is meant for large, unlikely losses you could not absorb. It is not meant for small, predictable costs.

Advanced level

Match the buffer to income risk: single income, variable income and dependants raise the number of months worth holding.

Expert level

Self-insurance (buffer) and market insurance are substitutes. Large rare losses suit insurance. Frequent small ones suit a buffer.

Professional level

Underwriting, adverse selection and moral hazard explain why policies carry exclusions and excesses. Regulated advice may be needed for product choice.