If you're like me, you've spent a lot of quality time this past month on the couch, endlessly watching football games and losing the remote with every first down. So you ended up seeing a lot of ads with the sound on, and for the first time in a while you remembered just how dumb they are. The winner of my personal stupid prize: Domino's "pizza carryout insurance," which offers a free replacement if you somehow manage to destroy your pizza on the way home.
This is just the latest in a long line of products that distort people's understanding of what insurance should be. Somebody has to put their foot down, and that somebody is me.
Let's remind ourselves what insurance actually is. It's protection against calamity. It's something that pays out only in unusual circumstances – and sometimes never – but definitely only when you would not be able to afford the loss.
If you can buy a pizza, pretty much by definition you can afford the loss of a pizza. You don't need insurance. The same is true of your iPhone, or of headphones you might buy on Amazon.
I'm not saying you would never use the insurance. Things happen; sometimes they happen to headphones. But the way such insurance is usually priced, you're paying way too much to offset the actual risk of having broken headphones. Plus it tends to include all kinds of stipulations and complications designed to make collecting more difficult. It's a rigged system, so please just don't.
Other kinds of so-called insurance stink too. Consider dental insurance, which typically comes with a maximum payout of about $1,000. That's the opposite of insurance, because it peters out precisely when you face the most unaffordable situations. It doesn't even cover one freaking root canal. For some reason, this is par for the crappy dental insurance course.
At least pizza and dental insurance actually pay out. That's not what happened with some companies that, ahead of the 2008 financial crisis, sold insurance to protect bond investors from defaults. Perhaps they should have been called premium-collecting companies, as opposed to insurance companies, because their mathematical models assumed that they would almost never have to pay out. They largely ignored the possibility that catastrophe could hit everywhere at once, so they didn't prepare. This is generally true for insurers of municipal bonds, which rarely default (with the imminent exception of Puerto Rico). But it's particularly true of those that expanded into mortgage-backed and other bonds. As a group they cratered when the crisis hit, failing in their most basic task as insurers.
Finally, there's the worst of all: Insurance you didn't knowingly sign up for in the first place. It's everywhere. Wells Fargo charged auto loan customers for insurance without telling them; banks take large fees for overdrafts instead of simply denying the charge; fake insurance policies add unnecessary cost to already predatory payday loans.
Real insurance does exist and we definitely need it. Health care is one area where horribly large, unexpected and unaffordable events really do happen. Another is automobiles, because we often cannot afford to buy new cars or pay for the damage they cause to others. These two types of insurance rise to the level of requirements for middle-class citizenship. They might be a bit expensive, at least for most people most of the time, because insurance policies are priced to be profitable on average. But we should all have them.
Maybe pizza insurance isn't the worst possible idea. What's galling is how these products so often skew or exploit our concept of what should be a product for the prudent. But they're not likely to stop, so we'll have to start getting smarter.