Pay Now For What Might Happen? Sometimes.

December 24, 2018

Insurance is a fascinating business concept. Get lots and lots of people to pay a little bit, very often, to meet the cost of what might happen to comparatively few of them, relatively infrequently. Figure out the math, and keep what's left. Everybody wins—potentially—even though most of the time, they're losing.

 

So, should you buy health insurance? Of course. Because when you break—and you probably will, in some way, sooner or later—the repair cost will be astronomical. Not to mention, if you don't pay for it, someone else will have to—because we have laws about taking care of human life.

 

But should you buy the extended car/phone/dishwasher warranty? Probably not. Here's why. Play it out:

  • A business is selling you a product. 

  • The objective of the business is to make money by selling goods and services, including repairs. 

  • The business may make money doing (or outsourcing) repairs, but only if those repairs are needed. 

  • Those repairs might well not be needed in the product life cycle—at least not the most profitable ones. 

  • However, the business will make money, no matter what, by selling the extended warranty up front.

 

Therefore, it's in the business's best interest to sell you the extended warranty. They've done the math. It's better for them if you buy it. If it weren't, the salespeople wouldn't try so damned hard. I've had lots of nice interactions with salespeople rapidly deteriorate at the moment of the extended warranty pitch. I don't buy it, and they don't get their commission, and they get very prickly. 

 

It doesn't take a neurosurgeon to figure out who's got the incentive. Even though you might occasionally end up needing repairs—and it's even possible, though rare, that they might cost more than the extended warranty would have—the math is clearly not on your side.

 

Exceptions to this exist, of course. If you work the hell out of your truck's transmission plowing snow, it might be worth it. If you're a contractor whose phone gets bumped and banged up all the time, it might be worth it. If you have a family of twelve and run your dishwasher five times a day, it might be worth it. It comes down to this: How much does your normal use differ from the average consumer's normal use?

 

So, give it some thought, and unless special circumstances make repairs likely, roll the dice and don't buy the extended warranty. That is, unless the likelihood of needing repairs is high enough—and the price of those repairs is high enough—to make it a no brainer. You know, like with health insurance. 

 

(You know what would almost always be a better bet than the extended appliance warranty, especially if you're young-ish? Take that money and sink it into your long-term retirement plan. You know…the one you're probably not maxing.)

 

 

 

 

 

 

 

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