The last time you bought a car, home appliance or electronic item, what add-on does the salesperson usually ask you to buy? Of course – the extended warranty. Most salespeople seem puzzled whenever I steadfastly refuse to buy the extended warranty. My answer is quite simple: “I only insure against catastrophic losses.”
If my smartphone breaks down right after the regular warranty, is this a catastrophic loss to me? Of course not – I can absorb the loss myself. The same principle applies to low deductibles on car and home insurance. If I have a car accident and I have to pay a $500 deductible instead of a $200 deductible, is that a catastrophic loss? Of course not – I can absorb the marginal $300 extra 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!
Break down all your insurance expenses and separate those that do not insure against catastrophic loss. Prudently eliminate those expenses and redirect them toward those neglected areas such as living benefits and the right type of life insurance.
You might have to cough up extra change for the occasional small losses, but you will save money in the long run. The money you save can go towards insuring the risks that aren’t so easy to recover from.