Many people forget that insurance is always a bet.  You bet that your car, house, or appliance will sustain damage requiring a repair, and the insurance company bets that it won't, and like a casino, it pads the odds a little to ensure a tidy profit.

The first rule of insurance is that, on average, the insurer always wins.  If they didn't, they couldn't be in the business for long.  Therefore, it only makes sense to insure what you cannot afford to replace when something bad happens or what you have reason to believe will be damaged at a rate much higher than average.

Cars and home insurance fall into the first category–so do health and life insurance.  If your car was totaled tomorrow, would you be able to write a check for a new one? Few people could.  Mortgages require adequate home insurance, but you would be foolish to forgo it even if you own your home outright.  Catastrophic health crises can bankrupt all but the mega-rich, and few families can easily weather the loss of a major earner.

But many families have policies on a dozen or more other objects around the house in the form of extended warranties, optional insurance, and service contracts.  I know families who have paid for extra protection on their game systems, Blu-Ray players, cameras, washing machines, air conditioners, printers, water heaters, cell phones, hard drives, yard equipment, computers, washing machines and dryers, dishwashers, Kindles, iPods, and so much more.

When one of these things breaks, they pat themselves on the back because they have to pay little or nothing for repairs.  This makes them more likely to choose the extra coverage option next time they make a purchase.  What they don't remember is all the times they never use their coverage—all the times they essentially throw their money away.  Every single time I've done a back-of-the-napkin calculation, I’ve found that the family has lost money on the total number of objects for which they carry plans, often to the tune of hundreds of dollars. It's a phenomenon called a frequency illusion, and companies from Sears to Home Depot to Best Buy rely on it when padding their bottom line with these extremely lucrative products.

So what, other than the big four—car, house, health, and life–should you insure?

Well, it depends on who you are.  If the likelihood of something breaking is unusually high, and the cost of the coverage is a reasonable fraction of the total price, insurance is worth it.

I'm clumsy, so my laptop falls into this category.  I've had to send it off for substantial repairs once a year, on average.  (A battery replacement plan, on the other hand, is just a way to charge you more for a predictable expense.)  If you are exceptionally hard on your cell phone or camera, it may be a good idea to purchase an extended warranty.  For many parents, insuring a child's expensive musical instrument can be a good idea, especially if your child is particularly forgetful or accident-prone.  I have personally had horrible luck with printers, and though I believe my children are primarily responsible (one printer, at least, was done to death by Cheerios), I will be buying an extended warranty with my next purchase.

But if the object is not likely to be dropped, kicked, or otherwise accidentally mangled, you are sure to be on the losing end of the insurance game in the long run.  After all, the first rule of insurance is that, on average, the insurers always win.

Let's keep the winning on our side—and the money in our pockets.  And happy savings!

What do you have insured?!

This has been a guest post by Genevieve from Bowie, MD
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