The Kinds Of Insurance You Probably Do Not Need.
I came across this interesting article over at MSN Money that listed the 10 kinds of insurance that you probably do not need and thought I would share it you. Mind you this list is not all inclusive or exclusive; but rather a nice guideline for people new to buying insurance so you do not get taken for things you mostly do not really need.
1. Private mortgage insurance: This is something that hits about a quarter of all homebuyers. When you buy a house, the mortgage company wants to make sure it won’t be hurt too badly if you skip town without paying off the loan. Unless you can put down at least 20% of the home’s value, you may have to get PMI. The policy’s purpose is mainly to secure the lender’s investment, but by doing so, it can help you buy a home with a much smaller down payment. You’ll pay for it in the long run, however. Premiums can amount to as much as a 13th mortgage payment.
Well, that sure does not start off the article very well. First they tell you this is insurance you probably do not need, and then the writer proceeds to tell you that if you do not have 20% to put down, you do in fact need PMI. I am sure most people find this out when applying for a mortgage, and I am also sure a LOT of people need PMI with housing prices being so high. So, sure, you don’t need it; but you also cannot buy a house without it if you don’t have 20% down.
2. Service contracts: These “extended warranties” are usually worth skipping. A service contract is simply a promise to perform or pay for certain repairs or services. Service contracts often duplicate what’s provided in the standard warranty you get with a car or an appliance.
Sure, they do duplicate the coverage, but its for an additional year or whatever. However, I agree with the point; we never buy extended warranties on anything. A lot of times your credit card will double the warranty if you buy the product with their card anyway, so why pay for the same coverage? I figure that if something is going to break it will probably break within the coverage period, so we save our money for more important things.
3. Separate policies vs. riders: Buying separate policies to cover things like boats or RVs may not be your best choice. While some policies provide added liability coverage and other features, check out if supplemental coverage is already available through your existing homeowners policy.
Also check with your car insurance company, as they might offer coverage on such things as well. I know my old company covered boats, motorcycles and even trip insurance for taking my car to Mexico.
4. Flight insurance: This coverage is pretty cheap. It’s a nice way to impress your mate, but a bad bet, thankfully. According to some statisticians, you could fly on a major airline every day for 26,000 years before you’d be involved in a plane crash. Even then, the odds are that you’d survive that crash. Besides, you may already have flight insurance, if you purchased your plane ticket with a credit card.
Total rip-off, I agree. And since I do not ever plan on flying in an airplane every day for 26,000 years, I think we will be ok without it.
5. Credit insurance: This insurance is often pushed on consumers. The most important thing to remember about credit insurance is that a lender cannot make you buy it.
The only reason to take this out is when a company offers you free money or services to “try” their credit protection, such as when credit cards offer you $100 in free gas for trying a program. I took advantage of this as well and am awaiting my $100 refund now. Just be sure to cancel the protector program before you have to start paying for it.
6. Short-term, cash value life insurance: If you don’t hold onto them long enough, cash-value life insurance policies are a waste of money. Cash-value life insurance theoretically offers both a death benefit (the money paid to your heirs when you die) and a return on investment. Your equity in the policy — the cash value — builds up over the years, and you can borrow against it or simply stop paying on a policy and let the annual dividends keep the policy in force. While your survivors will still get the death benefit, these policies cost you money in big chunks in the first few years.
Never ever buy cash value insurance. You have to hold it for years and year for it to even be worth anything, you pay a big commission to the insurance agent for doing nothing, and you pay more initially than you would with a term policy. Terms life insurance is the way to go, and you can just renew it if you are still alive when it expires. That way, you don’t pay huge sums for the entire life of the policy either.
7. Life insurance for children: This insurance offers a big death benefit, but kids don’t have debts or dependents.
Unless your kids pay the majority of your bills and they go to work every day at 7 years old, you probably do not need life insurance for your children. Instead, up your own life insurance by what you would spend on theirs, and everyone will be better off if something were to happen to you.
8. Mortgage insurance: It’s more expensive than it’s worth. Besides, you could do better with another policy — one that you might already have. These policies are designed to make your mortgage payments if you die or become disabled. If you’re worried about burdening your heirs with mortgage payments, you’d be better off buying straight life insurance.
Hopefully you have life insurance or disability coverage in case something happens and you cannot pay the mortgage. Also, do not over extend yourself on your house payments. I know people that make $40,000 and they bought an $800,000 house with nothing down and interest only for 5 years. Sure, they can pay the bill now, but what happens in 5 years if they are not making a lot more money? I am waiting to find out….
9. Cancer insurance: If you look closely at what you get, you’ll realize there’s a better way to protect yourself in the event you get sick: health insurance.
I agree….it is ridiculous. You have health insurance for a reason; you do not need cancer insurance on top of that. What is next, diabetes insurance? Parkinson’s insurance? Save your money.
10. Short-term medical coverage: There will be arguments a-plenty here. Often, this coverage is offered to those who leave one job for another. Under the federal COBRA law, your old insurance policy can “follow” you for about 18 months after you leave, but you have to pay the whole premium.
COBRA is WICKED expensive. When I left my job in September, I was offered COBRA…for my wife and I it was about $850 a month. We are in our late 20’s and early 30’s, healthy, and we do not have any health problems. You know why it was so expensive? My wife is of child bearing age, and that costs a lot on any premium. So instead of COBRA, we got an individual plan through Blue Cross (as I mentioned in my post “Consider getting your own health insurance, it could save you a bundle of money”). and we pay about $200 a month for both of us. Sure, it has a high deductible, but we are rarely sick and it still does cover having children. Plus, I get to still go to my same doctor which is great.
The most important kinds of insurance to have are health, home, car and life. Anything other than those 4 you are almost positively lining the pockets of the insurance company. Be sure you have those 4 before even considering any other kinds of insurance, as those 4 might even cover you for other coverage you think you need. And as for #1 on the list, PMI is a fact of life in this country right now. Housing is at a high (though slowly coming down a little but not really here in Los Angeles) and the only way to avoid it is save your money for a big down payment and buy what you can afford. Good luck!
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David:
Just a quick question on number 9…
Do you know anyone who has gone through cancer before?
There’s a reason why it’s a focus. Statistically one of the most bankrupting events in the U.S. Even with health insurance there is typically a mountain of indirect costs (loss of income, travel, childcare, etc).
Caner has passed up heart disease as the leading killer, and even more important than that: while deaths from Cancer go DOWN, diagnoses and costs of treatment go WAY UP.
Not for everyone, but anyone with a family who has to work to support that family, the coverage is very cheap and makes a lot of sense if you pick the right company.
Yes, I do…my own father died at 44 from cancer. And I still think its a poor choice of insurance. His regular health insurance covered 90% of his bills.
Weekly Roundup – 01/19/07…
Here’s a quick look at some of the personal finance articles that caught my eye over the past week:
Flexo is thinking about dumping NetFlix. My wife and I actually go ’round and ’round about this same thing. I don’t think we&#…
[…] Jeremy presents a case of getting your most important asset insured. At the other end, David cites a MSN Money article on some useless insurance policies you may want to abandon. […]
David:
Mine, too…but dying of cancer and surviving after fighting it for a couple of years are two different things. My dad had great life insurance.
However many people survive–over 60% these days (as opposed to 20+ years ago when my father died of cancer). And medical costs of going through cancer can add up to hundreds of thousands of dollars–and 10 percent of a really big number can be a pretty big number (if costs hit a million–not at all uncommon–that’s $100,000 that’s the patient is still responsible for) and if all that money works, life insurance isn’t there to pay those costs.
Plus, many people want to travel to specialists (Sloan Kettering, Johns Hopkins, MD Anderson, etc.) which means more time off work and travel, lodging, etc. Health insurance NEVER pays bills other than medical bills, so by itself it’s not enough.
Another way to go is self-insurance (simply having a large enough cushion saved up to take care of the unexpected) and that’s fine as long as nothing happens within about 15 years of when you start preparing for it.
Like I said, not for everyone, but for many it’s a smart move. I would say if someone WERE to get cancer insurance make sure:
* it covers all types of cancer (including skin)
* it has no lifetime limits on benefits
* it’s guaranteed renewable
* the rates are locked in
* it has riders for other catastrophic occurences (ICU, other illness, etc)
* it can cover a whole family for very little more than an individual.
* there is a very short waiting period before coverage begins (they can range from 30 days to several years).
By the way, sorry to focus on just that one…all of your other nine are right on the money.
That’s ok wdporter, I understand what you are saying. I just do not think that in today’s day and age, people should concentrate on one kind of insurance for one kind of disease, thats all. Everything costs so much money that you need to prioritize what realistically could happen to you versus what could maybe happen to you. If someone has the cash for cancer insurance, then by all means, go for it. But most people are more likely to get hit in their car, die in an accident, have something happen to their house, etc, so I thought the list should focus on things people don’t need unless everything else is covered and they have some extra money to protect themselves. Thanks for the comments and sorry you lost your dad as well to that terrible disease.
David:
I was wondering why you did not list disability insurance among your list of necessities? Statistically, especially with people in our age group, disability is much more likely than death. I would have been interested to see how some of the variable riders often found in disability policies stack up in a listing of insurance that is not needed. Any thoughts along these lines?
Hi Luke
Yes, disability insurance is pretty important as well. But for a lot of people, having insurance to cover everything is not a possibility, so I wanted to stick to the ones you definitely 100% had to have; and as I was discussing in some other comments above, if you have the extra money for cancer, disability, etc insurance, then by all means, get it.
Thanks for the comment, Luke, I should have mentioned disability at least!
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