Never Buy a Home Warranty

Jay asks how Dave feels about home warranties. Dave tells Jay to never buy one.

QUESTION: Jay on Twitter asks how Dave feels about home warranties. Dave tells Jay to never buy one.

ANSWER: Never buy them. Don’t buy home warranties. Don’t buy extended warranties. Don’t buy any of those kinds of things. The reason is very simple. About 85% of the home warranty amount is absolutely profit and commission to the people. It is unbelievable—the vast majority. About 12% of the extended warranty or the home warranty or the electronics warranty is actually the risk that you’re taking. In other words, the cost of the average item breaking down within the warranty period usually runs about 12%. The rest of what you’re paying is profit, commissions, overhead and marketing costs. I would rather just take the chance. Put $.88 in my pocket of every dollar—$888 of every $1,000 that I would’ve spent on warranties and $12 in savings, and on average, I’m going to cover the breakdown that those warranties would’ve covered.

If a warranty pays out more than it costs, on average, the warranty company goes broke. Think about it. If a car insurance company pays out more in claims than they take in car insurance premiums, they go broke. They have to do a statistical analysis, put it in a form called an actuarial table, which is the probability of the item breaking or the event that is insured occurring, and that probability per 1,000 policies sold gives them their cost of issuing the insurance, the warranty, the extended warranty—whatever it is. Then you have to add to that the other things.

There are some things you should not self-insure. They’re the big hits. We recommend you transfer the risk on those things. But the little things—for God’s sake, if your iPhone breaks and you can’t afford to replace it, you shouldn’t have bought an iPhone. Don’t buy an iPhone warranty or a Droid warranty. If you can’t afford to fix it, you can’t afford to buy it. Same thing with your car. A warranty comes with a car—new cars. I’m talking about a warranty that you pay for. Save your money.

The big items, you transfer the risk on. That’s why we buy life insurance. That’s why we buy homeowner’s insurance. If your house burns down, you can’t self-insure through that one. You can self-insure through your DVD player breaking. If you can’t, you don’t need to be buying a DVD player. You could self-insure through your heating and air going out. It’s called an emergency fund. You can’t self-insure through a triple bypass, so you have health insurance. On the big things, you transfer the risk. On the little things, you self-insure. By the way, that gives you more money to self-insure with because you’re not spending all your money on home warranties, extended warranties, electronics warranties and all these other rip-off things.