The Insurance You Don't Need
What Coverage Should You Have?
With all the bills you pay to feed, clothe, educate, nurture, and entertain your kids, insurance can seem like yet another burden on your strained family budget. But the checks you write for homeowners', life, and medical coverage serve a vital purpose: They help protect your financial future.
The same cannot be said for a lot of other insurance. Companies will try to sell you policies for almost everything, from vacations to identity theft to life insurance for your child. In most cases, purchasing these plans is a waste of money. By just saying no, you'll save a bundle -- without giving up your peace of mind.
If your car is at least five years old, there's a good chance you can do without a collision policy, which pays for repairs to your own vehicle. Say your old warhorse has a book value of $1,700 and you pay $500 a year for collision insurance with a $1,000 deductible. If you total the vehicle in an accident, the policy will only pay out $700 -- barely more than what you pony up each year. Check your car's book value at nadaguides.com. If the annual collision premium is more than 10 percent of what you could sell it for, it makes sense to dump the policy. And if you own a new car that's still under warranty (check your owner's manual), take a pass on mechanical-breakdown insurance -- you're already covered.
Skip those airport kiosk life-insurance policies that cover you in case of a crash. At roughly $60 per person per trip, they may seem to be a tempting bargain. But as long as you have a term or whole-life policy in place, you don't need extra coverage. Read through your credit-card agreement too: Some companies provide complimentary life coverage if you purchase the airline ticket with their card.
Also think hard before you decide to invest in trip-cancellation insurance. While these policies sound like a smart investment -- especially if you're paying in advance for a splurge vacation package -- they're pricey (adding 9 to 12 percent to your trip cost) and won't reimburse you if you need to cancel due to a work conflict or an illness that is deemed to be preexisting. For total protection, you'll need to spring for a comprehensive policy that may cost as much as 18 percent of your trip. If that's what it takes to help you sleep better at night, go right ahead. "Just don't purchase it from the same agency or supplier that booked your vacation," says Peter Greenberg, author of Tough Times, Great Travel. A reputable third-party insurer will protect you in case the company goes bust before you take off or set sail.
Credit-Card Balance Insurance
This type of policy will pay off your credit-card debt if you become ill, disabled, or lose your job. Sounds good, right? But most disability policies pay out enough to take care of your bills if you're unable to work. And setting up an emergency fund to cover three to six months' worth of household expenses is a far more cost-effective safeguard in case you're temporarily unemployed, says Jean Chatzky, author of Make Money, Not Excuses. Instead of dishing out roughly 10 percent of your monthly balance toward this insurance, you're better off using the money you'll save to pay down any credit-card debt.
Credit-Card Theft Insurance
If you get a call or an e-mail from someone offering to sell credit-card loss-protection insurance to you for a modest fee (perhaps $100 a year), hang up or press delete. The person may claim that if someone steals your card, you'll be liable for all the fraudulent charges. But that's simply not true. Federal law limits consumer credit-card liability for unauthorized charges to $50. No wonder the Federal Trade Commission calls this type of insurance an outright scam.
It's a scary figure: 10 to 15 million Americans have their identity stolen each year. So it may seem like a no-brainer to take out a $50-a-year policy to cover your costs if you're a victim. But know what you're buying first. This coverage doesn't pay back the money a thief takes from your bank account. It merely reimburses you for the expenses you incur in restoring your identity, such as phone calls, copying fees, and lost wages (in case you need to take time off from work to clear your good name). Many of these policies also exclude lawyers' fees, says Adam Levin, chairman of Identity Theft 911, a fraud-solutions company based in Scottsdale, Arizona. Plus, it's possible that your homeowners' policy already includes identity-theft protection.
This insurance protects you and your kids from skyrocketing elder-care costs in case you wind up needing care at home or in a nursing home in your golden years. It's a great policy to have -- just not if you're under 40. "As long as you buy by age 50, the premiums should stay between $400 and $1,000 per year," says Marilee Driscoll, a columnist at ltcmonth.com.
Life Insurance for Kids
The purpose of a life policy is simple: to support the people who rely on your income or caregiving in case you die prematurely. So why do insurance companies keep sending you ads offering cheap life coverage for your baby? Throw these come-ons out with the other junk mail, and use the money to firm up your family finances instead. "Saving for college and for your retirement is the best move you can make for your kids," says Chatzky.
When you buy almost any appliance, you're likely to get a hard sell on a service contract that covers the cost of repairs. That's because these contracts are a huge moneymaker (for the seller), not a worthwhile investment (for you). These policies can cost as much as one-third of your purchase price, and they often do little more than duplicate the warranty you already have. Many also don't cover the specific parts that are most likely to break. Plus, a number of high-end credit cards (such as gold and platinum) automatically double the manufacturer's warranty when you use them for the purchase.
There are exceptions: For big-ticket consumer electronics that are heavily used and most likely to need repairing within three years (such as laptops, PCs, and refrigerators), extended coverage probably makes sense. Shop around for the best deal (they vary widely in length and terms), and, as a rule of thumb, never pay more than 20 percent of the purchase price of the product for an extended warranty.
Check with your auto policy and credit-card company before your next trip. You may find one (or both) already provides all the personal-liability and collision-damage coverage you need. If so, you may be able to decline the extra $15 to $30 a day rental companies are dying to charge you.
Still, you'd better read the fine print of the contract first. Some major rental-car companies (including Thrifty and Dollar) recently started tacking on charges for renters who get into an accident to cover the car's diminished value and loss of use. Your automobile insurance or credit-card company may not pay for these fees, which could leave you stuck paying a portion of the bill. So you'll have to decide whether it's worth the calculated risk.
Even if money is tight, avoid canceling or paring back these policies.
- Health You know how expensive medical insurance is (an estimated 46 million Americans can't afford to get coverage). If you and your spouse don't have access to an employer health plan, visit healthinsurancefinders.com for the least costly coverage options in your area.
- Homeowners' or renters' If you have a mortgage, you must have protection in case your home is damaged by fire, storm, or theft or someone is injured on your property and sues you. Always buy a "replacement cost" policy, which covers the total expense of rebuilding your home or replacing your possessions. And if you rent, don't count on your landlord's insurance to protect you. His policy only covers the building itself. If there's a flood, storm damage, or a burglary, renter's insurance will cover the replacement costs of your damaged or stolen goods.
- Auto While nearly every state requires drivers to carry basic liability coverage, make sure you purchase a policy with minimum limits of at least $100,000 per person injured and $300,000 per accident, plus at least $50,000 in property-damage liability coverage (to pay for the other driver's repair bills). If your ride is less than five years old, get comprehensive auto insurance, which pays for repairs or replacement of your vehicle if it is stolen or damaged by fire, flood, or high winds.
- Life If you didn't apply when you got married, fill out the paperwork as soon as you have a baby. At-home moms need life insurance too: If something happens to you, your spouse will need extra funds to pay for childcare and additional expenses. A 20-year term-life policy -- which lasts until your kids are old enough to support themselves -- is more affordable than a whole-life or cash-value policy; the latter two have investment components that raise the annual payments.
- Disability The statistics don't lie: As a young parent, you're more likely to become disabled as a result of illness or an accident than you are to die. That's why it's critical to make sure you'll have a steady stream of income in case you're suddenly unable to work. "Even if your employer provides it as part of your benefits package, you may need a supplemental disability policy to ensure that your total payout equals 60 to 70 percent of your potential lost income," says Jane Bryant Quinn, author of Smart and Simple Financial Strategies for Busy People.
Originally published in the May 2009 issue of Parents magazine.