Maybe it’s because we’re in the business, but it feels like insurance is everywhere. We see ads on bus stops and in our Facebook feeds, and we’ve even been pitched insurance by our banks!

In these ads and sales pitches, it’s always just kind of assumed that you know what you’re getting. But what if you don’t? With this in mind, we thought we’d write up a quick explainer of how insurance works.

The problem

You probably have things that are expensive, like a phone, a laptop or a car. Every day, there’s a small risk that those things will break and need repairs, or be completely destroyed (ever spill a drink on your laptop?)

This is frustrating, because the odds of you destroying these expensive things on any given day are pretty low. But the impact of destroying them is pretty high. You’re probably not going to break your phone today, but if you do, you’re going to want to replace it ASAP. And since phones cost a lot, this could be a problem.

The self-reliant option

One way to solve this is by putting aside some savings. Let’s say you buy a $1,000 phone. To protect yourself from the risk of it breaking, you’re going to need to have $1,000 in a bank account. This is called self-insurance.

If you’re not rich, it’s probably going to take a while to save up that $1,000. If you break your phone before you have $1,000 saved up, you’re out of luck. If you break your phone after you have $1,000 saved up, you can replace it immediately – but now you’re back to square one, and you need to save up your money again. And that’s just for one item! Once you add on your laptop, or your car, the amount of savings you need to have aside is going to get really oppressive. It’s probably going to be too expensive to work.

You’re not alone

So it’s kind of a pain for one person to put aside $1,000. But it’s fairly easy for a thousand people to put aside $1 (or less) each. You could find a thousand people with the same problem, and convince them all to put just a little bit of money into a shared account every week. If you break your phone, or one of your new friends breaks their phone, you could just replace it with the money from that shared bank account.

This is a lot easier for everyone involved because you’re pooling your resources. As we said above, the odds of any phone breaking on any given day are pretty low. So you are unlikely to need to pay everyone in the pool, all at once. But since there are lots of you, you have enough to pay out any one person on any given day.

Unfortunately, now you have another whole set of problems. How are you meant to find a thousand people? How do you decide how much each person is going to put aside? Who keeps track of the money? Who pays you out when you smash your phone? Who decides whether you should get paid out or not? Who makes sure the money isn’t being stolen?  And so on, and so forth.

Here’s the insurance

That’s where your insurer comes in. The concept of insurance is pretty simple – it’s pooling money to reduce your risk. But actually delivering on that is a bit of a headache. Those questions above are just a few of the things you’d need to think about if you were going to pool your resources.



    An insurer does all of this for you. They do things like figure out how much you need to pay, they handle the money and they sort you out when you break or lose your phone, and need to make a claim.

    The upside for you is that you don’t have to put aside tons of money, like you would with self insurance, and you don’t have to work out all the fiddly details of tracking and managing a massive pot of money with lots of people paying in and making claims. For a fairly low monthly payment, you get the peace of mind of knowing your phone will be fixed or replaced when you accidentally step on it, leave it on the bus or drop it in the harbour.

    Phone insurance is just one type of insurance. You can insure all kinds of other things, like your car, your laptop or even your life. It all works in the same way, though: pooling everyone’s resources to reduce everyone’s risk.

    So that’s insurance 101. Sound okay? You can get an affordable quote for your phone or car today from Cove in as little as 2 minutes.