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Some policies you can do without

Clearly, 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.

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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 that.

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 Minnesota.

-- Posted: Sept. 23, 2003

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