When buying a car, home appliance or electronic item, what does the salesperson usually offer you? Of course – the extended warranty. As a matter of fact, I have found many salespeople express amazement whenever I steadfastly refuse to buy the extended warranty. My answer is quite simple: “I am a financial planner by profession and I practise what I teach. I only insure against catastrophic losses and apply these principles in all areas of my life.” If my washer or dryer conks out right after the regular warranty and needs repair, is this a catastrophic loss to me? Of course not – I can absorb the loss myself. If I have a car accident and have to pay a $500 deductible instead of a $200 deductible, is that a catastrophic loss? Of course not – I can absorb the loss myself. If I add up all the extended warranties or low deductibles I could have bought in the past, could I afford to buy a new stereo, washer or dryer with the savings? Of course. In summary, insure against catastrophic financial loss caused by death, disability, critical illness, liability, fire, earthquake, flood, etc. Don’t insure the small stuff!
Another thing that I find amazing is the number of people who have life insurance on their children – very often as a savings plan! I do not have the time to go through the analyses here, but life insurance makes a horrible investment and investments make horrible life insurance. They are two different things and should be treated differently. The best thing you can do for your children is to set up a Registered Education Savings Plan (RESP) and get the government to co-contribute 20% or set up a tax-effective In-Trust Account. As far as the insurance is concerned, I love my children dearly but there would be no financial loss incurred if any of them, God forbid, should die – there would be a huge emotional loss though. I hate to be crass, but my children do not bring an income into our household. It is more prudent to have insurance on my wife and I.
Solution: Break down all your insurance expenses and separate those that do not insure against catastrophic loss. Prudently trim those expenses and redirect them toward neglected areas such as living benefits plans and the right type of life insurance.
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