3411: Are Home Warranties Worth It? by Mike Ballew of EggStack on Evaluating Home Coverage

This next one's for all you CarMax shoppers who just wanna buy a car your way. Wanna check some cars out in person. Uh-huh. Wanna look some more from your house. Okay. Wanna pretend you know about engines? Nah. I'll just chat with CarMax online instead. Wanna get prequalified from your couch? Whoo. Wanna get that car? Hey. I said, Pete. You wanna do it your way. Wanna drive? CarMax. This is Optimal Finance Daily. Are home warranties worth it? By Mike Beaulieu of eggstack.com. No. Home warranties are not worth it. Home warranties are forced savings for people who don't have the self discipline to save. Items that predictably wear out from normal use are not good applications for insurance. Good insurance. There are two kinds of insurance in this world, good insurance and bad insurance. Good insurance is relatively inexpensive, and it covers tragedies which are highly unlikely to occur. But if it did, you would be completely wiped out. An example of good insurance is homeowners insurance. If you own a home and have a mortgage, you have homeowners insurance. Homeowners insurance covers calamities such as fires, earthquakes, floods, tornadoes, and hurricanes, depending on the policy. It's relatively inexpensive considering how much it pays if you have a claim. On average, homeowners insurance costs about a $100 per month. If your home burns to the ground, the insurance company is on the hook for the home's entire value. Homeowners insurance is inexpensive because there is little risk that something like that will happen to you. Do things like that happen? Sure. Every day. But will they happen to you? Highly unlikely. Bad insurance. Bad insurance is just the opposite. It costs a lot and pays very little. A home warranty is an example of bad insurance. Home warranties cost anywhere from $300 to $900 per month. Yet if you have a claim, they don't pay anywhere near what homeowners insurance would pay if your home burned down. Home warranties come with numerous deductibles, limitations, and exclusions. Chances are, if you have a home warranty and you file a claim, you'll be disappointed with the results. Is there something illegitimate going on here? No, not at all. Home warranties are perfectly legit, and people who buy them get exactly what they sign up for. The items typically covered by a home warranty include major appliances like refrigerators and washing machines, as well as a home's heating and cooling system and water heater. The useful lives of those items are well documented. It's not a mystery if your heating and cooling system stops working after fifteen years or your washing machine conks out when it's ten years old. What is insurance? Let's step back for a moment and examine the basic concept of insurance. What is it? In the simplest terms, insurance is a group of people pooling their money together to cover the cost of something catastrophic happening to one of them. Insurance exists so that a person …