Insurance is all about spreading the risk. A bunch of people buy insurance against the risk that a few of them will be the ones who get hit with a big bill that they couldn't pay. The model works fine for house fires and car crashes. However, it's a terrible model for ordinary, predictable expenses. Here's some tips on picking what to insure and what not to insure.

The basic rule for all kinds of insurance is: Bear the risks you can afford, insure the ones you can't.

The key point is risk. There's no point in insuring your predictable expenses, even if they're large. For example, around here homeowners need to pay their property taxes twice a year, and each payment is pretty big. But there'd be no point in "property tax insurance," because there's no risk to spread around--the insurance company would have to charge a premium that added up to what you were going to pay in property taxes anyway (plus enough to make a profit).

Two fairly common kinds of insurance that fall into this category are dental insurance and optical (or vision) insurance. To the extent that they cover the cost of checkups and basic care (fillings, new glasses), they're really just paying for routine expenses that you could easily budget yourself.

There are two reasons why it's better to budget these things yourself rather than buy insurance for them (although they both come down to the insurance company's profit).

First, it's cheaper. The insurance company makes its profit by charging more in premiums than they expect to pay out. If you just pay the expenses yourself, that's all you have to pay. (The insurance companies also pick up a little interest by holding the money between when you pay the premium and when they pay the claim--which is interest that you could be making, if you budgeted for the expense yourself and set the money aside until you needed to pay for the dental exam or the new glasses.)

Second, you're not vulnerable to capricious insurance company decisions about what's covered and what isn't. If you keep your money, you don't have to go to the insurance company and ask if they'd please give some back to pay your claim. After all, the other way the insurance company ensures its profits is to deny claims. They do that mainly by having complex rules that they constantly change.

For example, I used to always get my teeth cleaned in June and December. Then my dental insurance switched from covering two cleanings a year to covering one every six months. Having gotten my teeth cleaned in late June, it was impossible to schedule a December cleaning--the first half of the month was out, because it wasn't six months later, but with the holidays, there weren't any regular cleaning appointments left in the second half of December. So, my next appointment ended up being in January--after which, of course, I couldn't schedule my next appointment in June at all. Never mind that I'd been getting my teeth cleaned in June and December for 30 years. (A few years later they changed the rules again....)

There are similar rules for glasses. They'll cover frames, but only medium-priced frames. They'll cover lenses, but not the charges for over-sized lenses or progressive bifocals. They'll cover an anti-scratch coating, but not an anti-reflective coating. If you happen to want just what they'll pay for (and not want the stuff they won't), you can get full value--but you can do that by just keeping your money and buying your own glasses.

Of course, there's one big exception to all this: If someone else is paying. If you're getting optical or dental insurance as part of your employee benefits, it may well be a good deal. It's still a silly way to pay for getting your eyes examined or your teeth cleaned, but if your employer will give you a couple hundred bucks a year to do that, but won't just give you the cash, then you might as well take it. (And, of course, there are plenty of kinds of insurance that's worth buying: life insurance, health insurance, disability insurance, car insurance, travel insurance, etc.--because they cover the risk that something bad will happen.)

If it's coming out of your own pocket, there are two key questions:

1. Is there a risk? If your cost is predictable, you don't need insurance, you can just budget for the expense and pay it yourself.
2. Is the risk substantial? A small risk you can bear on your own--you don't get insurance to cover the risk that you'll drop your groceries while bringing them home, because it's a risk you can afford to take.

If there's a risk, and if it's big enough that you can't bear it on your own, then insurance is the answer. Otherwise, just budget the expense and pay it yourself. You not only get to keep the insurance company's profit, you make sure that you're the one deciding how to spend the money.