Why? Because some people do the math and conclude its not worth the money. Within the first few months, if you need to replace your phone, its worth it to have had insurance. But after a while, with the amount of value that the phone drops plus the amount you have paid and continue to pay, not everyone sees this is a no-brainer.
I'm not saying that you should or shouldn't have insurance, I know a lot of people do have it and I'm not knocking it.
Personally, I calculated that I will have spent as much in insurance after my 2 year contract to have bought a second phone at the projected price (you can already buy them on ebay for $250 if you're patient- just got one for a coworker. In another 1.5 years, it will probably be ~200 if not less. Do the math and see how much you'll have spent yourself).
I just don't like spending what will ultimately be the value of my phone at the end of this ordeal "just in case".
But anyway, I'm just pointing it out since you said you don't understand why someone would do that.
BTW, what's so terrible about following through with the manufacturer's warranty?
Oh, and TEP can be added later too if/when u need it. All you need to do is temporarily swap phones, and they count it as a new handset, able to have TEP added. Good to know...