When Shakespeare observed, “What fools these mortals be,” he easily could have been referring to our tendency to buy unnecessary or downright useless insurance.
Granted, some insurance coverage is absolutely necessary, including home, health, auto, life and long-term disability. Ignore these at your peril.
But on more than a dozen policies — especially narrowly focused single-purpose coverage on things like accidental death, cancer, credit card fraud and mortgages — we simply fall victim to fear and salesmanship and purchase coverage that is redundant, unnecessary, impractical or downright wasteful.
“All of the single-purpose insurances turn out to be a bad deal,” says Gail Hillebrand, senior attorney for Consumers Union.
“You have to ask what the loss ratio is, which is for every dollar taken in, how much is paid back out in claims? It’s quite common in various kinds of credit insurance for it to be 10 (cents to) 15 cents on the dollar and even less, as opposed to your car insurance, which turns out to be paying 80 (cents to) 85 cents on the dollar. It just illustrates how bad a deal it can be.”
What’s worse, 19 percent to 25 percent of us overpay for insurance by purchasing coverage with zero or low deductibles, according to a recent study, “Why Do People Buy Too Much Insurance?” by New York University Stern professors Zur Shapira and Itzhak Venezia.
“It was kind of surprising,” says Shapira. “Almost always, you should get a high deductible rather than a low deductible.”
Jack Hungelmann, a veteran Minneapolis insurance agent, risk management consultant and author of “Insurance for Dummies,” says our tendency to buy too much and/or frivolous coverage is the norm rather than the exception.
“You want a balanced program so that all the major losses are equally well-covered, with prudent use of deductibles,” he says. “Most insurance programs I audit are out of balance.”
Ready to trim your insurance costs? Here, in alphabetical order, are 14 policies you can probably scale back — or live without.
- Accidental death insurance
- Automobile collision
- Automobile medical
- Cancer/dreaded disease insurance
- Credit card insurance
- Credit card fraud insurance
- Extended warranties
- Flight insurance
- Flood insurance
- Life insurance for a child
- Mortgage life insurance
- Optional group life insurance
- Rental car damage insurance
- Scheduled property
Accidental death covers you in some, although by no means all, of the ways you could die accidentally — that is, perishing due to something other than disease or old age.
However, chances are your existing life insurance policy will cover you in most of those events anyway.
Accidental death falls under what Hungelmann calls “Las Vegas coverage,” because the odds of it happening are slim.
“Don’t waste your money on that,” he says. “If you need life insurance, buy enough so that it covers all circumstances. Don’t buy just for certain scenarios.”
Auto collision covers the cost of repairing your vehicle in the event of an accident. If you lease or finance your ride, you likely are required to carry it.
But many drivers jump the curb by needlessly carrying a low deductible, which increases your premium. Hungelmann says any deductible below about $1,000 is likely wasteful, especially on an older vehicle.
Also, if you can afford to pay for repairs yourself, steer away from collision coverage.
This is especially good advice if you have driving while under the influence, or DWI infractions, or other tickets or accidents on your records, or if you are insuring a young male driver. In such situations, you are unlikely to want to turn in a small claim anyway.
“So if you’re not going to turn it in, why pay for it?” Hungelmann says.
Most states require a minimal amount of automobile medical coverage, which covers you and your family for injuries or death in an auto accident.
Given that you have health coverage, the chief reason not to buy more than the required minimum is that, in most states, health insurance is secondary to auto medical.
That means that in the event of an accident, any additional auto medical coverage you have will actually go toward letting your health insurer off the hook for the bill.
You can take out a life insurance policy that pays if you die from a short list of specific diseases, such as cancer.
However, this is a little like betting a specific number on a roulette wheel, rather than on red or black: The chances of hitting it are slim.
Better to put that money toward a term life policy that covers you for a wider range of dire ends.
Don’t pay even a few bucks a month for a policy that pays off your credit card debt should you lose your job, become disabled or drop dead.
Instead, your money would be better spent on staying out of credit card debt altogether, or insuring against those possibilities directly.
“If you die, who do you want to get paid — your spouse or your credit card company?” says Hillebrand. “And the unemployment policies often don’t repay the whole balance — they only make the minimum payment.”
For all the come-ons to insure your credit card against fraud, you would think that the federal government hadn’t enacted a $50-per-card cardholder liability limit on purchases made with a stolen card. But it has.
What’s more, many banks and card issuers have adopted a zero-liability policy to keep you happy and spending.
“Your credit card company helps create the fraud problem by not being careful about monitoring activity, and then they’re selling you insurance for it? That seems wrong,” says Hillebrand. “You really do not need to be paying extra for fraud insurance. Just read your statements carefully and make a fuss in writing if you see something wrong there.”
Why would you buy a two-year extended warranty on a new 42-inch plasma TV when the manufacturer’s warranty covers it already?
NYU’s Shapira says the answer has to do with what psychologists call framing, our state of mind in the moment of decision.
In this case, the risk of ending up with a suddenly useless $1,000 TV, however remote the possibility, seems greater than the $40 for the additional coverage.
“Companies like Circuit City make a fortune on the warranties they provide,” he says, “even though in today’s reliable consumer electronics market, defects are only going to happen once in 10,000, or whatever.”
Statistics show that your chances of perishing on a commercial flight are far less than on the freeway, yet people still insure against it.
“Flight insurance is definitely not worth spending money on,” Hungelmann says. “If you buy flight insurance, what you’re really saying is, ‘I’m scared to death that I don’t have enough life insurance if I die.’
“What you should do instead is buy a cheap term life policy.”
Forget flood insurance unless you live in a floodplain or have a walk-out basement.
“Because hardly anything is covered down there except the furnace and appliances; all the carpeting and personal property is not covered,” Hungelmann says.
The chances of a 100-year deluge shorting out the washer and dryer in a walk-out basement are remote at best.
The purpose of life insurance is to provide for your family and loved ones after your passing. Although you can insure the lives of your children, why would you?
It’s backward; the chances are far greater that they will outlive you.
Instead, use that money to buy an extra $50,000 term life policy on you, not them.
Mortgage companies like to offer homeowners life insurance policies that pay off the old homestead when you kick the bucket.
“It’s the same question: Who do you want your money to go to when you die?” says Hillebrand. “In a few cases, if you are older and sicker and regular life insurance is going to be hard to get or more expensive, you might want a mortgage policy. But short of that, I wouldn’t recommend it.
“What you really want is well-priced term life to protect your family.”
Optional group life coverage can be a lifesaver for those whose health has rendered them uninsurable.
But there’s the rub: If you are a healthy nonsmoker, being lumped with that high-risk pool can wipe out any cost savings you might have realized with group coverage. What’s more, should you leave your job, you can’t take it with you.
Explore a term life policy first before you sign up. To find the right policy for you, check out InsureMe, a Bankrate company.
Everybody has been there: You stand at the rental car counter and the clerk asks, “Do you wish to waive the optional coverage?”
Yes, amigo, you do.
“Your auto coverage extends automatically to a rental car,” Hungelmann says. “If you have full coverage on at least one vehicle, you won’t need to buy optional coverage.”
If you don’t have full auto coverage in place, you’re not necessarily stuck. Your umbrella home-life-auto policy may cover rentals, and many credit card companies will provide first-dollar coverage on damages if you charge the rental on their card.
Judicious use of “scheduling” — singling out valuables like jewelry and artwork for individual underwriting — can make quite a difference in the event of a loss.
Take artwork, for example.
Most insurers offer the option to schedule artwork, even though most policies place no limit on coverage. If you scheduled your prize painting for $20,000 and it is stolen, you get $20,000 from your insurer, even if the painting has doubled in value over the years.
If, however, you did not schedule it and can provide documentation (photos, receipts, appraisals, etc.) that it was worth $20,000 at the time you insured it, you would receive $40,000 for its loss.
“If you’re going to replace something, schedule it,” Hungelmann says. “If you’re not going to replace it and all you’re going to get for it is cash, why spend the money?”