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Don’t Trust Insurers, Agents, and Companies That Say “What Ifs”
Posted By Jim On 08/07/2007 @ 9:21 am In Personal Finance | 18 Comments
What if you get into a car accident? What if your house burns down? What if you lose your job? What if you have a medical emergency?
Life is full of “what ifs” and life is full of businesses looking to capitalize on the fear of the unknown. It’s kind of sickening when you think about it, how employees of companies will try to use this fear of the unknown to get you to sign up for a policy or buy a particular product even when it doesn’t make financial sense from a probability perspective. When a company does the “what if” game with you, take a step back and do the math to see if that really does make sense.
Insurers are the best at the “what if” game because that’s what they’re all about. Buy comprehensive coverage for your vehicle because what if someone steals your car and they find it on fire in a ditch somewhere? Well, what is the cost of the comprehensive coverage and what is the probability that someone will steal your car, set it on fire, and drive it into a ditch? I currently pay $306 every six months for liability coverage for my vehicle (protects other parties in the event I am the cause of the accident). Adding comprehensive and collision coverage to my 2003 Toyota Celica would add an additional $600 onto the bill with a $1,000 deductible, for an annual cost of $1200, to cover the “what if.” My car is worth approximately $15,000 which means I would have to expect a total loss once in the next 11.6 years (14,000 / 1,200) for it to pay off.
Two years ago I was in an accident, in which I was not at fault, that totaled my 2000 Acura Integra. The Integra, estimated value of $14,000, did not have comprehensive or collision coverage, saving me approximately $1200 a year for two years, and because of the price I paid for it, I essentially paid nothing for the car and drove it for two years. Will the decision pay off for my Celica? I won’t know for 9.6 years but it paid off for the Integra, I saved $2,400 across two years.
Real estate agents are also great at preying on the unknown as well. “Do you really want to show your home to a bunch of strangers?” should really instead be “Do you want to be paid 3% of the commission on the sale price of the home to show your home to a bunch of strangers?” On a $300,000 home, that’s $9,000 – more than what most people make in a few months after taxes. I’d be willing to stay home on Saturdays to show the home, field phone calls, and put up signs around the neighborhood. If you’re scared about dealing with contracts and other legal matters, hire a real estate lawyer and you’ll still come out ahead. Certainly the decision is yours but you either do the work yourself or pay someone else to do it.
Companies do this all the time in any number of ways but the most popular is in buying warranties or other types of guarantees. It’s well known that extended warranties are junk because either the product can last past the warranty (otherwise they wouldn’t offer it) or you can get a better deal elsewhere (lots of credit cards double the regular warranty up to a year). I won’t go into the details on why it’s a bad deal but just do the math – what’s the probability something bad will happen and how much will it cost you? Does it make sense to buy a warranty?
Don’t let fear of the unknown be the reason why you do anything, think it through and do a little guesswork, research, and math. If the decision to get a warranty or go with an agent still makes sense, then do it. Insurance is a good thing, real estate agents are a good thing, and warranties are sometimes good as well. Don’t let the decision be based on fear and “what ifs” and let it be based on an educated decision and you’ll be better off.
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