Rule of Thumb on Insurances To Avoid

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Here’s the rule of thumb I use on whether or not an insurance policy is worth getting – if they are willing to sell you insurance without knowing anything about you, don’t buy it.

Think about how much information you have to provide if you’re buying any kind of “traditional insurance.” With life insurance, you have to submit yourself to a physical. For auto insurance you have to offer up your car’s history, your credit history and your driving history, which is being tracked by a third party. For homeowners insurance, you have to provide a history of claims on your home (don’t worry, it’s tracked by a third party), your own credit history, and home details.

When you buy travel or trip cancellation insurance, they don’t need anything except your money. When you buy cell phone insurance, they don’t need anything except your money. Extended warranties? Just send in a check.

The reason why these insurance policies don’t care about you, and only about your cash, is because the profit margin on these policies is astronomical. They make so much money off travel insurance and extended warranties that they don’t care how risky you are or how likely you are to use it. They just know that any random Joe off the street is going to generate a profit. The only way they can be assured of that is if their profit margins are high enough.

If you’ve ever looked at the business model of an insurance company, it’s fairly simple. You collect premiums, invest the “float,” and then hope that the gains off the float offset the claims payouts. You expect to pay back all of the premiums in the form of claims in an average year. In a “good” claims year, you pay back less and in a “bad” year you pay back more than the premiums you’ve collected (hopefully less than the gains from your investments). [This is based on reading Berkshire Hathaway annual reports, which are remarkably fun to read]

Insurance companies manage risk by analyzing and scrutinizing who they insure. When they don’t do either, you know they must be making money hand over fist at your expense.

What do you think about my rule of thumb? Makes sense? Totally off base? Please let me know!

{ 17 comments, please add your thoughts now! }

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17 Responses to “Rule of Thumb on Insurances To Avoid”

  1. zapeta says:

    Makes sense to me. Extended warranties and travel insurance are often mentioned as things that you don’t need and you provide a reasonable explanation.

    • billsnider says:

      I agree about extended warranties. I don’t feel that way about trip insurance. I once had to cash one in due to an accident.

      Bill Snider

      • Glenn Lasher says:

        I concur. I’ve never had to cash in a trip insurance policy, however, I also know that I live close enough to the financial margin that getting stranded is something that my budget could not sustain.

        Let me head off the “if you’re that close to the margin then you shouldn’t travel” posts that are inevitable to follow. Airline tickets are cheap when bought well in advance. When you are at the gate, however, the price goes up as much as twentyfold. They know they have you by the short hairs, and they aren’t afraid to pull.

      • Dan says:

        Agree as well – no to warranties, possibly to travel.

        Has the author got actual experience with these? Or just dreaming up controversial topics to generate feedback for the site?

  2. FlyFisher says:

    GREAT rule of thumb. If they don’t bother checking to see if someone will cost them more than its worth, they must be making a lot of money off the other guys! I also enjoy the BH reports, got to love Buffett.

  3. Mohkev says:

    Seriously? Travel insurance is not worth it? I would agree with that if it is a flight across the country. But, if you are spending a couple thousand dollars on an international trip, you don’t think the extra hundred is worth the piece of mind? The chance of me using that policy is very low. Truthfully, I would *like* to keep that chance at zero. But, just like a map in the wilderness; I’d rather have it and not need it than need it and not have it.

  4. I many many years ago received social security for a child based on his deceased father. It wasn’t until an uncle filed ten years down the road that Social Security figured out my child had been receiving benefits on the Uncle’s name. Talk about a mess. And it was Social Security no less that made the mistake.

  5. That is a great rule of thumb. In general, I agree that travel insurance is a waste of money, especially if most of the cost of the trip an be cancelled or you can afford to take the loss of an airline ticket. However, if it’s an expensive trip I may purchase it because it’s really not very expensive if you search around for the best price. I did use it once. My son was scheduled to go to France with a high school group. The morning of the trip he was unable to go due to medical issues and I was refunded the full amount of the trip. I was certainly glad I had it that time. For the cost of about $100 I got my entire $2500 back. I have also taken a couple of international trips where the country I was visiting required proof of medical insurance and medical evacuation coverage.

  6. cubiclegeoff says:

    I generally agree. But travel insurance can be good for certain situations, as long as you know what they exclude. One example is if you have an infant and plan on traveling. Kids get sick all the time and if yours is one of them, it could be worth considering, because one ear infection and they can’t fly.

  7. Yana says:

    I would never buy an extended warranty, and pretty much reject anything that a salesperson is extremely eager to sell me. I like being self-directed when it comes to spending money.

    As far as them not caring how risky a customer is or how likely the customer is to use the insurance/warranty, I think that is because when you “buy” the non-product, you are buying an illusion. Whether you ever get anything, or what you get, is not up to you – even though your money was good. The collectors of your money are the ones who determine what if anything you get, and they interpret the fine print as they wish. It’s mostly free money for them, although if a consumer puts up a good, time-consuming and intelligent fight, they might get something. Few people do that.

    • Shirley says:

      Many years ago we bought a used minivan and our son who is “into cars up to his ears” talked me into buying the 3-year extended warranty.

      Twenty six months into it, the transmission was replaced at no cost to us. Thirty-five months (just before it expired) the entire engine was replaced. That warranty purchase paid off but most don’t.

  8. cdiver says:

    I bought an extended warranty on a large projection tv many years ago. I had a bulb go bad on it 2 months after the manufacurers warranty expired. After having that repair done, I have not renewed it.

    • Shirley says:

      When buying a large LCD screen TV, the young salesman tried to convince us that an extended warranty was the “way to go”. When I asked him if the TV wasn’t built to be expected to last more than two years, his answer was a sheepish grin and ringing it up without the warranty.

  9. debra says:

    I once bought an extended auto policy through my credit union. I was told it was a “bumper to bumper coverage” just like a new car warranty. It even covered a hotel if you broke down out of state. Well that’s what happened. I went to a graduation in Arizona and had an electrical problem. I called the warranty number and no answer. When I got back was told the “engine harness electrical was not covered”. After protesting was told I could have a pro-rated refund of my policy amount that I paid for. Peanuts! I filed for small claims and got my whole amount back. Plus the claim was paid out of car insurance who covered it as a fire, since there was smoke.

  10. Chuck says:

    I agree extended warranties are not really worth it but travel insurance is…you don’t want to get stranded. Before you buy it though check your credit card company…alot of them have that as some sort of perk if using there card!

  11. Elloo says:

    First off, somebody delete the inappropriate post from this fool and bore, mernatti.

    As to extended warranty insurance, you have to pick your shots. I bought some expensive kitchen appliances, and only purchased it for the fridge, which would have the most expensive repair bill compared to the other ones. Also, you purchase something using the AmEx card, they double the warranty up to one year. I have used their service many times over the years with excellent results.

    I highly recommend insurance for cell phones. Sprint has replaced my expensive smart phone 2x in the past 2 years with no deductible.

  12. cheetaMan says:

    I bought an extended warranty on a treadmill, but it was a service plan. After the manufacturer one year expired I called my warranty service provider and they came to tune it up. That alone paid for the plan. I was told, if it needs service all I have to do is call. That’s what happened. I recommend it.

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