Some policies you can do without
you need insurance to protect yourself and your family against the financial
costs of a serious illness or accident, or property damage from a natural disaster.
However, some insurance policies are more money than they are worth, at least
for most people.
The list of policies that fit this description is an ever-changing
one, as insurance companies -- like all other businesses -- continually develop
new products for their customers. How can you tell if a policy is worth it?
One thing to watch for is a policy that's unreasonably complicated.
"The more complicated somebody makes something, the easier it is for them
to fool you," says Phil Cook, a Certified Financial Planner and president
of Cook and Associates, a financial planning firm in Torrance, Calif. That's
especially true with insurance contracts, which can contain numerous clauses
and provisions that exclude any number of possible occurrences.
Another red flag is coverage that's very narrowly defined. Policies
promising to cover you against cancer are a case in point. Without a doubt,
you'll want this protection. However, most -- if not all -- major medical insurance
policies cover cancer, just as they cover other diseases. It's typically less
expensive to obtain comprehensive, broad-based coverage, rather than purchase
several policies that each focus on a specific disease or condition.
Here are several types of insurance that most people will find
unnecessary or expensive:
Extended warranties. If you've
ever purchased a major appliance or piece of electronic equipment, you've probably
been asked (perhaps repeatedly) by the salesperson to also buy an extended warranty.
These are supposed to cover repair or replacement costs if the appliance malfunctions
after the manufacturer's warranty has expired.
Most consumer finance experts agree: Save your money. "These
are huge profit items for the stores. That's why the badger you for it,"
says Lewis Mandell, professor of finance and managerial economics with the University
of Buffalo, Buffalo, N.Y. In many cases, defects will be apparent within the
first few months, when they're covered by the manufacturer's warranty. What's
more, it's often not much more money to simply replace the appliance once it
goes on the fritz, rather than pay for the extended warranty.
Rental car insurance. Here's another
scenario: you're heading on vacation, and as you sign for your rental car, the
agent asks if you'd also like auto insurance. The policy covers you in case
you get in an accident while driving the rental car.
Most people don't need this coverage. If you have standard levels
of homeowners, renters, auto and life insurance, as many people do, you already
are protected for a large number of travel-related incidents in the United States,
according to the Independent Insurance Agents and Brokers of America, a professional
group in Alexandria, Va.
Of course, you'll want to double check your policy before heading
out. Most -- but not all -- auto policies cover accidents you have in a rental
car, or offer this coverage through a rider. Typically, this is significantly
cheaper than purchasing insurance at an extremely high daily rate every time
you rent a car.
A couple of caveats: Your policy may not cover you if you're using
the car for work. In that case, check that your employer's business policy covers
you. And, your policy may exclude any driving you plan to do outside the U.S.
Again, check your policy or ask your agent if you'll need special coverage.
Life insurance sold by credit card and
mortgage companies.When you open your credit card statements, you'll
often see an offer for life insurance. If you take the offer, the policy will
pay any balance remaining on your account when you die. "That's what life
insurance is for," says Robert Klein, associate professor of risk management
and insurance at Georgia State University.. Life insurance proceeds can be used
to pay any bills outstanding when you die. What's more, it's typically cheaper
to obtain coverage through a term life insurance policy, rather than through
policies offered by credit card companies.
Typically, the only people who benefit from these types of policies
are those who know they're going to die within a short period of time, says
Mandell. "There's such a high margin on the policies, that there's usually
no pre-qualification required." Again, however, it pays to read the policy
carefully. Some may exclude certain pre-existing conditions.
Similarly, when you take out a mortgage loan, you may receive
an offer for an insurance policy that will pay off your mortgage, should your
house be destroyed by a natural disaster. "It duplicates your homeowners
coverage," says Klein.
"As a general rule, it doesn't make sense to buy specialty
coverage," says David Nye, professor of finance and insurance and director
of the Florida Insurance Research Center at the University of Florida. "Typically,
a person is better off finding good, broad-based coverage." The reason?
It's more expensive for the insurance company to administer several specialty
policies, rather than one larger one. Ultimately, the policyholder pays for
Crime insurance. One new type of insurance policy promises
coverage against the expense of being a crime victim. For instance, the family
protection policy sold by the Chubb Group of Insurance Companies, Warren, N.J.,
covers expenses associated with home invasion, stalking, carjacking and child
abduction. The company will pay relevant medical and psychiatric bills and reimburse
lost wages, among other expenses. The policies, which are available in about
eight states, run about $100 annually.
Without a doubt, these are horrific crimes. However, it's worth
asking how these types of insurance policy offer much beyond peace of mind.
"Child abduction and kidnapping are catastrophes, but you can't insure
against the emotional loss of a child," says Robert Weagley, associate
professor of family and consumer economics at the University of Missouri. Insurance
is intended to protect against catastrophic financial loss. In addition, while
such crimes make the headlines, the vast majority of Americans are not affected.
Unreasonably low deductibles. Finally,
there's one type of often-unnecessary insurance expense that many people overlook:
carrying a low deductible. "Go for high deductibles, especially on coverage
you have to have," says Cook.
Boosting your deductible by even a modest amount can mean significant savings. Let's say a 35-year-old man in California purchases a standard auto insurance policy with an annual premium of $1,200 and a deductible of $120. If he boosts the deductible to $500, his premium drops to about $980, says Cook. In other words, the extra $380 in coverage he gets with the lower deductible ($120 rather than $500 = $380 extra coverage) costs him $220 ($1,200 premium rather than $980 = $220) annually. In two years, he will have saved $440 -- which, of course is more than the $380 in extra coverage. Additionally, the $440 is an actual cash savings whereas the $380 is not.
If you do increase your deductible, you need to make sure you
can swing the higher out-of-pocket costs you might incur. If there is no way
you can do this, you may need to go with a lower one until you can save enough
to cover the higher deductible.
Karen M. Kroll is a freelance writer based in
-- Posted: Sept. 23, 2003