I get asked about extended warranties, which I regard much the same as I regard health insurance. Both are mostly of psychological value only and – often – of negative value, financially.
Both are a form of bet. The “house” – i.e., the insurer, the company offering the extended warranty – is betting they won’t have to pay you. The policy/warranty is structured accordingly – i.e., to maximize the odds in favor of the house. It is of course sold as a boon, a way for you to “save money.” But to believe this is to believe insurance companies (and car warranty companies) are a kind of charity, looking out for your best interests as opposed to theirs.
In other words, a fool’s bet.
Thus, the policy has many asterisks, caveats and lines of fine print – all designed to limit the likelihood of the issuer’s liability to have to pay out – whereas you are certain to pay in.
And that’s the hinge, the fulcrum – the point of consideration to . . . consider.
How likely is it you’ll be filing a claim – as opposed to the certainty of the cost of the coverage?
With regard to health insurance, the answer will largely depend on your health and habits, which are related and very much under your control. Assuming you have no chronic or congenital problems and assuming you maintain healthy habits such as eating healthy food in moderation, maintaining a reasonable body weight, exercising and are sensible about the risks you take (e.g., do not rock climb freestyle, without ropes) then it is a reasonable bet you will need not any “health care” whatsoever and thus, buying health insurance is a poor bet in that the “house” will clear the table of your chips and leave you with nothing – except your good health.
A way to even the odds in your favor is to bet on your own health – by keeping your chips.
Instead of sending the insurance company several hundred dollars each month (or more; many people are betting the equivalent of their rent or mortgage payment on health insurance each month) put those dollars aside. Now you win the bet regardless. If you need to pay for some incidental thing – some stitches, let’s say – you can just pay for them and not for anything else. If you don’t need to get those stitches – and the odds are, you won’t – then you will still have those dollars. Which will then be available to spend on something else you may actually need.
Assuming you have a sound car (this is where due diligence comes in; you have an obligation to yourself to avoid buying a new car that is known to be high-maintenance and problem prone and to do all you can to assure that any used car you are considering buying is of good stock and in sound condition, as by reviewing service records and having it once-overed by a competent mechanic you trust) and assuming you practice due diligence by taking good care of it, the odds of a major problem happening – one that costs more than the extended warranty on offer – are likely low.
In the same way that a healthy 39-year-old is unlikely to suffer a heart attack anytime soon. It is possible, of course. It is also possible Trump will be reinstated as president this year. Do you want to bet on it?
Keep in mind – again – that extended warranties (and health insurance polices) are based on actuarial calculations, which is a fancy way of saying they calculate the potential cost of a payout and adjust what you pay accordingly. Thus – in this case of an extended warranty – if they know it will cost them say $2,500 to replace a transmission that is likely to fail (and they are well-aware of what is likely to fail, based on their own due diligence) then that is probably what the warranty is going to cost you.
They are also well-aware of what is not likely to fail – and those things they will generously cover, since it is unlikely they will ever have to pay to fix them. This operates on the same principle of health insurance policies for single, childless men that offer excellent maternity/child care coverage.
If you practice due diligence, financially, you will know before you buy whether a car you’re considering has a weak link and you can either avoid buying that car (sensible) or you can put aside a sum sufficient to cover yourself in the event the weak link breaks. This reorients the odds greatly in your favor since you cannot lose the bet.
An even better bet is to start with a healthy car and keep it healthy by taking good care of it. If you do both, the odds of ever having to spend more to fix it than the cost of an extended warranty are as low as the odds of that healthy 39-year-old having a heart attack.
Or the Orange Man resuming his office by Christmas.
Insurance sells fear, chiefly – in order to get you to buy psychological security. The health insurance mafia wants you terrified of constantly imminent sickness, in order to sell you coverage – which probably won’t actually cover it (or all of it) if you actually do get sick. The extended warranty people want to sell you a policy on precisely the same basis.
You should only be scared – and buy – if you actually are unhealthy and unwilling to do anything to change that (or unable to). And only if you’re not careful about the car you buy – and how you take care of it.
Remember: The house always wins. Which is why it is good to be the house.
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