Only Buy Insurance For The Big Stuff

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These days you can buy insurance for anything. Your new digital camera. Your cell phone. Your rental car. Your newborn baby. This Slate article titled ‘Risky Business: Should you ever buy rental car insurance?‘ sums up my thoughts on insurance in general very well – you should only purchase insurance to protect you from something really significant.

Examples include the death of a spouse that you depend upon for income or care, your house burning down, and needing serious medical care. After that, what constitutes ‘significant’ will be more of a personal decision. For some, $1,000 may be significant, while for others it may be a drop in the bucket.

Why draw the line at significant events? Insurance companies are great at math. It’s not going to be profitable for you to get the insurance. Even after Katrina, State Farm had a net income of $3.6 Billion last year. Insurance is designed to transfer risk at a price, but why bother to pay money to transfer risk that you can handle? Examples:

Car Insurance – The higher your deductible, the cheaper your insurance. Go as high as you can afford. We have our collision deductible set at $1,000. Anything less than that I’d rather fix it myself. If $1,000 will kill you, maybe you should go for $500 instead. I think if you drive defensively one at-fault accident every decade is high.

Is your car only worth a couple thousand dollars? Consider dropping collision completely!

Rental Car Insurance – As the article suggests, rental car insurance is definitely a bad deal. Of course you should double-check with your insurance company, but chances are you are already covered by your own auto insurance (and subject to the same deductibles). After that, if you can also get free secondary coverage from many credit cards. Are you really any more likely to get in an accident with a rental than with your regular car?

Just be sure to check your rental for dings or scratches before you drive off. If you see any ask for it to be noted, or better yet, ask for another car.

Pet Insurance – After doing my pet insurance research, I think this is a personal call. If you would pay $10,000 for a full cancer treatment course and that amount would be a burden for you, then you should consider getting pet insurance that covers that sort of thing. We have decided to self-insure our dog, but we would still be able and willing to spend thousands on care if needed.

Cell Phone Insurance – I can’t believe I bought this for a while in college. Cingular charges $4 a month for insurance with a $50 deductible. So for a phone that can be replaced on eBay for $150, you’d have to be losing a phone every 2 years just to break even. Of course even after 1 year very few phones are worth $100, and after two years you’d be getting another free phone for renewing your contract anyways!

Also, for the same reasons right now I have no dental insurance.

Credit to Sri for the article link.

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Comments

  1. The slate article points out well that you have to look at insurance and what it is covering. You really need to look at your needs and the payoff. Travel insurance purchased at the airport is another one of these – There is a lot of insurnace out there which is nothing more than a bad deal.

  2. I couldn’t agree more. A lot of insurance is a waste of money. Life insurance ( for those with dependant spouses or children), disability insurance and medical insurance are the ones we consider necessary or which provide a good return. Maternity insurance was one of the best investments we made. We have home and contents insurance but are looking at reducing the amount of coverage on the basis that we would not need to replace a lot of the stuff in our home. I have mixed views on the value of building replacement insurance for our apartment but as the premium is included in the management fees we have no choice in the matter.

    For those insurances which we do have we shop around each year where possible – pricing varies considerably.

  3. Overworm says:

    The explosion of insurable facets of life astonishes me. I’d love to work in the insurance company department that decides what new thing is insurable.
    “Let’s insure vacation trip payments.”
    “No, let’s insure against getting food poisoning or sunburned during one’s vacation and ruining the experience.”
    “Insurance for quality of life elements?”
    “Yeah.”
    “Okay!”

    I remember, in the late 1980’s when I was began purchasing my first electronics as a young adult, being amazed that the salesperson offered insurance for my television. “Do I really need that?” I asked him. “$400 is a lot of money to lose if something happens,” he said. He was right, that was a lot of money for me at the time; so much so that I had to purchase the television on lay-away installments. I bought the insurance. I remorsed over that insurance purchase for weeks and months. Since then I’ve never purchased store insurance for any item. That television lasted ten years and never gave me any trouble until someone broke in my house and stole it.

    A friend bought an expensive big-screen TV a few years ago and purchased the store insurance for more than $100. A couple of months later, two knobs/buttons fell (or were broken) off. When he called the store to have them repair the knobs, the store said the insurance covered only electronic parts. It wasn’t a huge deal because he could control those functions from the remote, but it soured him on store insurance.

    It’s a shame that some people will purchase anything. I have one idiot acquaintance who bought a time-share, insurance against the possibility that he might be unable to make the payments, and more insurance to cover what that insurance didn’t cover. I tried to explain why all three purchases were a bad idea, but he doesn’t agree.

    Good article

  4. Pragmatic Finance says:

    I’ve had one accident in about 8 years of driving and I was able to get it fixed for less than the $500 deductible. So essentially all that money into collision payments was wasted. I did the math last year and realized with my old car I would have to have alot of accidents just to break even so I had it removed. Definately not worth the money if you don’t have a fairly new or expensive car in my opinion.

  5. I debated the same thing regarding dental after quitting my job, and I decided to continue it. Over the six years, I’ve broken or chipped my teeth three times and have been told many times that I’d need one of them eventually crowned. I figure that puts me in a high-risk category, so I better continue it while I can! For many of these, I think people mismeasure the amount of risk to which they’re actually exposed, so there are plenty of people who pay for unnecessary insurance while there are others who certainly could use something as seemingly pointless as cell phone insurance. The best part about these types of insurance, though, is the premiums usually don’t differ across different risk groups, so the guy who breaks a phone once a month still pays the same amount as the guy who never breaks a phone. It clearly then becomes worth it for the former guy.

  6. You inspired me to call Cingular this morning and drop the cell phone insurance! The guy in India tried his best to convince me to keep it, but I’m now $4/month richer!

  7. Oops, my dental insurance link was pointing to the wrong post. The correct post details why it was worth it to me (my dental insurance option was not cheap nor that great).

    Ah, I forgot mortgage payment insurance. Get good health and life insurance instead!!

  8. As with anything, you have to look at it from a financial stanpoint and throw in the probability of the worst case event happening.

    Vacation insurance for example, if for some reason you book an island vacation in the middle of hurricane season you might opt for the insurance (and then fake illness for a doctor’s note).

  9. Larry J says:

    There is a something called a bathtub principle were on a graph you draw a bath tub. The X axis is equal to probability and the y axis is equal to time. At the top of the tub for til it reaches the bottom is when the probability of the item breaking down but usually that is within most year warranties. It then flat until it peaks and the end of the bath tub. Most warranties that salespeople sell you is when the probability of the product breaking is low and right before it climbs back up.

  10. I worked for Enterprise Rent-a-car for a while after college. We were told to sell rental insurance which I considered at that time a rip-off until the day came and I had to drive one of the rental cars myself, I ended up in a car crash. I did not have to report ANYTHING to my insurance company and the rental insurance too take of my doctors visit and chiropractor visits.
    If you have to take rental insurance(Which I advise) take the one that just covers the car. Some credit cards also cover rental cars, so it would be good to check.

  11. I’m with you Jonathon. I insure my vehicles (It’s the law here), my home from fire, destruction, earthquake), and my life (since I’m the breadwinner).

    I don’t insure:
    My wife (stay at home mom)
    Pets
    Daughter
    funeral insurance
    appliances
    tools
    electronics
    or anything else

    As I get older, if I meet my financial goals, I’ll insure myself for more of this. I purchased term life insurance and expect that our net worth will be high enough by the time this policy runs out, that we’ll be self insured. Of course, when that time comes I’ll have to make the decision.

  12. Anonymous says:

    how’s your life insurance?

  13. Ted Valentine says:

    Pet insurance??? Sorry, but if my dog gets too sick I’m putting it down.

  14. Ted Valentine says:

    Hazzard,

    I do insure my wife (SAHM). She provides a very very valuable service that would take a lot of money to replace. 20 year term insurance is very cheap and you don’t need to get very much ($100 to $200k should do it). I think it may be worthwhile unless you already earn enough to cover that expense.

  15. Hazzard,

    You should definitely be insuring your stay at home wife with disability & life insurance. If she dies/is disabled you will have to pay someone for childcare. Stay at home moms provide a lot of value that you are not considering.

  16. Haha, mobile phone insurance. What a joke!

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