When you’re asked to buy a protection plan, do this instead

I have a pretty nice laptop. It was bought for me as part of my previous job, and when I left, I negotiated to be able to take it with me.

Along with ownership of the laptop came the warranty, purchased as standard operating procedure.

But now I’m at the point where my warranty is expiring, and I’m of course being asked to renew the warranty for one more year. Cost: around $300.

I could pay it, of course, and be solid against disaster for a while longer. Or there’s something else I can do.

There’s always something to protect

When I buy a plane ticket, I’m being asked to insure my purchase against trip cancellation or trip interruption. When you buy an iPhone you of course need AppleCare. And no matter what it is you’re impulse buying on Amazon, chances are there’s some kind of protection plan you can buy on it.

These add-ons are meant to answer the question, “what if?” As in: “What if I’m not able to travel?” “What if it breaks?” “What if something happens?” They provide peace of mind.

Why I don’t purchase these plans

But I never purchase these plans, and would generally not suggest that you purchase them either.

The main reasons for this are:

• They may not cover what you think they do. I know of someone unlucky enough to buy a plane ticket and then had to cancel their trip. They went to make a claim against their trip protection, but later found out that the protection wasn’t valid for the claim. Money down the drain.
• You probably won’t use it. The people who put out these plans are smart, and generally have done the math to figure out how long a product is likely to last, and set the protection plan to expire before that time. And if you don’t use the plan, all that money is gone.

But what if you do have a valid claim, and the plan would pay out? Wouldn’t it have been worth purchasing the plan then?

Well yes, of course. But you don’t know in advance which plans are going to be worthwhile and which one won’t.

A suggestion

Which is why I suggest:

Every time you are asked to purchase insurance or a protection plan on something:

• Decline the purchase
• Put the money into a savings bucket

Should the need arise where you must make a repair on something that you could have bought a protection plan for, pay for it out of this bucket.

Self-insurance

You are putting money away against the potential for something to happen. When that thing happens, you have the buffer available to you so that you’re not left at a disadvantage. This is self-insurance.

Self-insurance can be about anything, not just purchases. For example, people talk about needing life insurance, but if you have ten times your income saved up in the bank, you don’t need life insurance anymore. Your savings is your life insurance.

Now, not everything can or should be self-insured. Obviously, you need auto insurance if you drive, as that’s a legal requirement. And anything that you couldn’t handle on your own requires insurance. That’s what it’s there for.

But not everything falls into that category. Not everything requires insurance.

When you are self-insured, you will have an even greater sense of peace of mind than any protection plan could offer.

So as for me and my $300 warranty? I’m going to reserve that money, along with other money I didn’t use to protect things. Eventually, when something breaks and needs to be repaired or replaced, I’ll be ready.

What do you think about protection plans? Important to purchase, a total racket, or somewhere in between?