Only buy insurance for expensive items you couldn’t afford to replace. Most people shouldn’t buy extended warranties and shouldn’t buy travel insurance. If you can afford to replace the item, save the money from the insurance and self-insure.

Insurance for inexpensive items is generally a bad buy, that’s why it’s profitable for companies to offer, on the whole the premiums will be greater than the payouts. That’s true even after adjusting for adverse selection, a recognition that many buyers will be precisely the people who believe they’ll wind up with a valid claim.

You’re still betting that the company standing behind the warranty or insurance will be around to pay out. And you’re betting that you can make them pay out, without the effort in doing so being more costly than the value of the claim.

These are precisely the costs that people usually don’t factor, at least until their story winds up in the Washington Post:

“Eileen McGarry and her family were in the middle of their vacation on Grand Cayman in August when reports came in that Hurricane Dean was barreling toward them. They were ordered to evacuate their lodging amid news of impending disaster.

But their insurance denied their claim for the cost to get off the island, because they left the island too early.”

I save the money on travel insurance, all those times I don’t have claims the savings add up. Then I can pay the costs of an interrupted trip out of pocket and not have to rely on fighting a bureaucracy in hopes of recovering part of my costs.

This isn’t the same thing, by the way, as arguing against paying a premium for flexible airfare or hotel bookings. That’s a post for a different day.

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