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Dave Says: Why Insurance and Not Warranties?

by | Feb. 08, 2011

Finances

Dear Dave,

Can you explain how you view the difference between warranties and other types of insurance?

Anonymous

Dear Anonymous,

The purpose of insurance is to transfer risk that you cannot afford to accept. Let’s look at life insurance as an example.

I recommend having about 10 times your annual income wrapped up in a good, level term life insurance policy. If you make $50,000 a year, have a family, and you don’t have $500,000 saved up, then your family cannot afford the risk of you dying and losing that income. In cases like this, you buy insurance to transfer the risk. Now, once you have that kind of money saved up, and especially if you have no debt, you won’t need the insurance policy, because you’re self-insured.

When it comes to items like warranties on things, I look at it this way: If you can’t afford for the item to break and pay out of your own pocket to have it fixed without it crushing you financially, then you can’t afford that item. Don’t go out and buy some big, fancy computer if you can’t afford the repair shop bill if it crashes.

You shouldn’t be buying stuff if you’re that broke. Period!

—Dave

* To see if Dave is bringing the Total Money Makeover Live! event to your city this spring, please visit daveramsey.com/category/events/.
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