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My mother-in-law would like to insure her single family home AC unit while my wife and I are informally renting a room with her. Is this possible?

Although the unit is 10 years old and runs fine, she could not afford to replace it and is paranoid it will fail, so she uses it only when others visit...in Florida! Since my wife and I can't do without it, we'd like to help her insure it in the tiny chance it fails during our stay.

This seems like a better idea than running an expensive window unit and never leaving our room.

Do I have any other options to mitigate this risk?

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1  
The local utility companies often offer such a plan. Have you contacted them? –  JoeTaxpayer Jul 7 at 22:02
    
HVAC systems can fail due to lack of maintenance (oil, coolant leak), so an annual maintenance check might be useful. –  ChuckCottrill Jul 8 at 1:20
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If she never uses it, why does it matter if it fails? –  BrenBarn Jul 8 at 1:54
    
This is probably obvious, but the math in this Q is made weird by the fact that a temporary tenant is being asked to assume all the risk of an appliance breaking when the item has existed long before their arrival. If we were strangers we should only pay a pro-rated amount of the home insurance premuim, but we're her only family, so you can't reduce this to a raw numbers/risk/actuarial game. –  Steve Clay Jul 11 at 15:15

5 Answers 5

up vote 7 down vote accepted

Your mother-in-law might consider a home-repair policy that covers all of the major systems (HVAC, Water heater, plumbing, garage doors, perhaps even appliances). She would buy this policy to reduce the risk of a large expense not handled by monthly cash-flow. She might do this because she has a fixed income, and does not have an emergency fund, in the same way a landlord at a single family home might want to avoid cash-flow risks.

The cost of the policy is certain to be higher than the actuarial cost (cost of claim x probability of claim during insured time period) of repair/replacement of a failed system, as the insurer would need to cover sales costs, operating expenses and profit in addition to the direct policy cost of system replacement. The value to the insured is the predictability of the premium payment.

Insurance only makes sense for large and unpredictable expenses (unexpected, major medical bills, death or debilitating injury, other unforseen and large loss). You would not insure for elective/cosmetic surgery (large, predictable), haircuts (small, predictable), or lost keys (small, unpredictable)


Note: some people use AAA to insure against the inconveniences of lost keys, flat tires, and dead batteries

Note: some people buy extended auto repair warranties, cell phone warranties, and extended warranties on consumer goods, to mitigate the inconveniences of these unpredictable events.


Insurance is based upon information advantage. An insurer uses actuarial knowledge (claims history, statistical models) to predict claims, and then prices the policy to ensure premiums exceed risk plus costs and profit. Should an insured to have better knowledge of claim probability, they would only buy coverage near to their needed claim instance. Thus, an insurer constructs their policy to prevent purchasing a policy only when the protection is needed. This is why many economists believe insurance is a flawed product, demanding unequal information.

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+1, though you may want to consider defining 'actuarial cost'. Also, note that many people consider AAA (automobile associations) to essentially be insurance for lost car keys, bad car batteries, and other such minor inconveniences. Not seeking to start discussion, just noting. –  ChrisInEdmonton Jul 8 at 1:19
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Agreed, AAA is often used as insurance against minor inconveniences (small, unpredictable) such as keys, gas, batteries, and flat tires. –  ChuckCottrill Jul 8 at 1:28
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IMO those "insurances" are in fact "reassurances" that are paid to gain peace of mind and the feeling of preparedness. Because actually getting a claim approved and the loss paid for is almost certainly not going to be convenient. –  Michael Borgwardt Jul 8 at 6:56
    
Thing about AAA is that there really isn't a claims process. I've used them extensively when I still had my beat-up car, and it became a necessary insurance when I was using 1-3 tows annually. Apologies if I'm going too off-topic. –  Thebluefish Jul 8 at 15:43
    
Accepted this because it may be the most practical in our situation, where we're working through a lot of debt and wouldn't have an emergency fund big enough to cover an AC unit for a long time. –  Steve Clay Jul 11 at 14:59

With insurance in general, you really should use it only to mitigate risks that would bankrupt you. Because your insurance premium will always be the cost of the actual risk plus the insurer's operating expenses and profits. Unless you believe you know the risk better than the insurer - but given that they can exist as a company only because they know how to assess risks correctly, I'd never assume that they're wrong without very good reason.

So if you and your wife would not go bankrupt over replacing that AC unit, you should just offer to cover all or most of the cost of replacing the unit should it break during your stay. If you don't have an emergency fund for such things, that's a separate problem that needs to be addressed.

Another question is: if your mother-in-law never uses that unit anyway, why would it be a problem if it breaks? Lowering the resale value of the house? Does she intend to sell that house anytime soon? Would the broken AC unit really lower its value more than the cost of replacing it?

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I clarified in the Q that she uses it rarely, when others visit. –  Steve Clay Jul 8 at 11:11
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This seems like bad, dangerous advice. Losing my car won't bankrupt me, but I should still insure it. As @ChuckCottrill said below, insurance should be for large, unpredictable expenses. Only things that would bankrupt you is going too far. –  Jeremy Lee Jul 8 at 19:36
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@JeremyLee I thought this deserved its own question: money.stackexchange.com/questions/34053 –  Lilienthal Jul 9 at 11:00
    
+1 Makes great sense assuming you have a few grand set aside. If we did, stuffing into an envelope the cost of a premium every month while we're there would certainly be the way to go. –  Steve Clay Jul 11 at 15:03

A home warranty (better called a home service contract) provides exactly this service, usually for all built-in appliances in the home.

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While this is actually the answer that the OP is looking for, I'd like to point out that most home warranties are definitely not worth the cost of premiums vs replacing an appliance. They may be worth getting the seller to throw one in when purchasing a house, but the annual premiums for the ones I've been sent offers for will usually pay at least half the cost of a major appliance. Worse still, they usually have an $80-100 service fee if something does actually break. I've repaired all the appliances I've had fail so far for less than the service fee - including my HVAC and my clothes dryer. –  Doresoom Jul 8 at 16:46
    
@Doresoom: Agreed 100%. I got lucky: my home warranty has paid for itself for each year of home ownership. But you are right that it is very unlikely you will save money! –  Jacob Krall Jul 9 at 0:42

Probably. My local utility (BGE) has a subsidiary that will add a fee to your monthly power bill and cover things like routine inspections, etc.

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+1 for mentioning a specific example. Nice addition to the other answers. –  ChrisInEdmonton Jul 8 at 1:20

You can insure almost anything -- Lloyds of London is famous for brokering insurance bets on odd challenges. Whether you can afford to pay what the insurance company would charge you for an uncommon policy is another matter.

It's worth investigating the policies others have mentioned. But please remember that, on average, having someone else insure you will by definition cost more than "self-insuring", since they will want to take a profit out of the deal.

So if you only want to insure it during your stay, I'd simply tell her that you'll pay the costs of running it and/or repairing it during your stay. Of course since the additional use could theoretically cause it to fail sooner but after you'd left, that might not reassure her much.

Frankly, I'd be inclined to simply gift her with a new window A/C for the guest room. Cost is probably under $250, it avoids arguments over load on the system for the rest of the house, you could plug it into a Kill-a-Watt and measure exactly how much electricity it's using and pay her for that if you want to make sure you've completely covered the costs... and it would leave her with a backup option if/when the main unit does fail.

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OP specifically said he did want to go that route (the window unit). –  JoeTaxpayer Jul 8 at 18:30
    
Understood. I still think it's the best available answer short of taking responsibility for the whole existing AC system for the foreseeable future, given that the owner distrusts it. –  keshlam Jul 8 at 21:50
    
Agreed, it's an odd situation. Not quite PF in my opinion, a bit on the fringe. –  JoeTaxpayer Jul 8 at 22:04

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