Insurance for small consumer products are not rational for the buyer, for the very reasons which were presented in the question. If you can afford the loss of the item, it’s better to not buy insurance and just buy the item again in the case it is lost or destroyed. Why insurance companies are still making money out of extended warranties for consumer products, is because they have good marketing and people are not perfectly rational. Gambling, lottery, etc. exist for the same reasons, despite having a negative expected value.
However, if you cannot afford the loss, it is advantageous to buy insurance. There are things which people own but cannot replace on short notice, and suffer greatly if they do lose it. For example, houses, or business-crucial items. You can afford to pay the insurance, but cannot afford losing the item in question. Taking a loan to replace it might be much more expensive than the insurance.
There are situations when losing something might cost you much more than its monetary value. Losing your house might make you homeless. Losing you car, if you require it for your job, might cost you your job. Having an expensive machine you make your living out of, losing it might put you out of business. Not having enough money to afford an expensive operation might cost you your life if you don’t have the health insurance which would have paid for it.
Insurance for small consumer products are not rational for the buyer, for the very reasons which were presented in the question. If you can afford the loss of the item, it’s better to not buy insurance and just buy the item again in the case it is lost or destroyed. Why insurance companies are still making money out of extended warranties for consumer products, is because they have good marketing and people are not perfectly rational. Gambling, lottery, etc. exist for the same reasons, despite having a negative expected value.
However, if you cannot afford the loss, it is advantageous to buy insurance. There are things which people own but cannot replace on short notice, and suffer greatly if they do lose it. For example, houses, or business-crucial items. You can afford to pay the insurance, but cannot afford losing the item in question. Taking a loan to replace it might be much more expensive than the insurance.
There are situations when losing something might cost you much more than its monetary value. Losing your house might make you homeless. Losing you car, if you require it for your job, might cost you your job. Having an expensive machine you make your living out of, losing it might put you out of business. Not having enough money to afford an expensive operation might cost you your life if you don’t have the health insurance which would have paid for it.