Insurance By Any Other Name

It has become routine with virtually all retail purchases. I recently bought my son a $25 box fan at Target and was asked if I wanted "protection coverage" for it. I gave the clerk a quizzical look and asked, "For a fan?" She shrugged and answered, "we're required to ask for any appliance purchase."

It goes by any number of names: extended warranty, protection coverage, purchase protection. Anything other that what it truly is - insurance. Whether you buy a car, cell phone or box fan, chances are some type of insurance is available for it. One publication estimates roughly $35 billion is spent each year on these type of coverages, which mostly translates into profit for retailers. A couple of behavioral finance principles are at work when one is confronted with an offer to insure something we've just bought. The endowment effect is one such principle. Research shows we place greater value on something we possess, and having just purchased a box fan (my box fan) surely it must be protected, right?

Frankly, retailers know we are distracted at checkout. I can barely add two plus two with a toddler screaming behind me at checkout. It's akin to trying to complete the SAT while the proctor scratches the blackboard with very long finger nails. A few weeks ago I was at a major tire retailer purchasing 4 tires for my son's car. The tires were $72 each, with a 55,000 mile warranty. I'd researched this before purchase and figured the tires should last him through college when he would presumably be ready for a new car (and off my payroll!)

At checkout the total seemed higher than expected, so I asked for an itemized breakout. They'd added $13 / tire (18%of the tire's cost) as a "tire certificate" - coverage (insurance) that replaced the tire for any road hazard. When I demurred on the tire certificate, the clerk said he could "only today, offer you that coverage for half price." I'm not sure if I'm skeptical or cynical, but when I hear "only today" my antenna twitch, and not for good reasons.

The way I figured it, at $52 (assuming it was a nail that couldn't be plugged for $10) it was almost the cost of one tire. In this case, being a behavioral finance geek probably helped me keep a little more money in my pocket.