Why Recommend Insurance And Not Warranties?

A Twitter listener asks Dave to explain how he views warranties versus other types of insurance. Dave offers his thoughts on the subject.

QUESTION: A Twitter listener asks Dave to explain how he views warranties versus other types of insurance. Dave offers his thoughts on the subject.

ANSWER: Most other kinds of insurance are on something you cannot afford to self-insure. The purpose of an insurance policy is to transfer risk. If you do not have $500,000 saved up and you make $50,000 a year and you have two little kids, your family cannot afford the risk of you dying and losing your income. So you buy life insurance to transfer that risk. You buy a $500,000 life insurance policy until you have $500,000. Once you have the money saved up, then your family is okay, because you have such a good pile of money and no debt and your family’s fine without any life insurance. Then you don’t need life insurance. You can self-insure.

On items like warranties, if you cannot afford for the item to break, you cannot afford to buy the item. If you cannot afford for the computer to break and get it fixed, then you cannot afford the computer. You shouldn’t be buying a computer if you’re that broke.

Most things with warranties—almost all things—are items you should be able to self-insure, meaning you ought to be able to have the money to fix it if it breaks, without it crushing you financially. If you can’t, then you shouldn’t buy that item.

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