Don't pay for protection without first stopping to think. Many of these products prey on our fears and offer little value.
Some forms of insurance and financial protection are not only smart, but legally required: For example, most states demand some sort of vehicle insurance.
Other coverage just makes sense, such as renters insurance or flood coverage for people who live in low-lying areas.
But, there are many forms of protection — sold in the name of insurance, monitoring and warranties — that are at best questionable, and that prey on one of our most powerful natural instincts: fear.
Here are some types of coverage that may not make sense for some people — or that should be avoided altogether by everyone:
1. Identity-theft insurance
Identity-theft insurance does not really prevent identity theft. Instead, the National Association of Insurance Commissioners suggests taking other protective measures, such as guarding your Social Security number, shredding financial documents and monitoring your credit activity.
Identity-theft insurance policies also do not cover the money lost through an ID scam. Instead, most policies cover expenses incurred in restoring your identity and credit, and you can probably take most of these steps yourself, writes Hal Bundrick at U.S. News &World Report.
The NAIC says identity-theft insurance ranges from $25 to $60 per year. Most policies have benefit limits ranging from $10,000 to $15,000, and many have deductibles requiring you to pay the first $100 to $500.
Credit monitoring services are closely related to ID theft insurance. But these, too, offer to perform functions already provided by your credit card company. They also offer to watch transactions that you can monitor yourself.
You can get fraud alerts from your credit card company and free credit monitoring from some financial institutions and other organizations, according to the Privacy Rights Clearinghouse.
2. Extended warranties
Whether you are buying a TV, computer or hedge trimmer, chances are the salesman will suggest you purchase an extended warranty. In most cases, you don’t need it.
Products seldom break during the two-to-three-year period after the manufacturer’s warranty and service plan expires. And the repairs can cost less than the large amounts you are paying for the warranties, according to Consumer Reports.
Consumer Reports also says stores keep 50 percent or more of what they charge for these contracts, which is a considerably larger profit margin than they make selling the product! The salesperson gets a hefty cut of every warranty sold.
3. Home warranties
Consumers frequently expect more than these plans deliver and end up frustrated. See: “Are Home Warranties Worth the Money?” for a breakdown of the pros and cons of home warranties. Hint: There are few “pros.”
If you decide to go with a warranty, read the fine print to see what is really covered. Money Talks News founder Stacy Johnson tells of the time he had a home warranty that covered his refrigerator. “When it broke, I had to pay $50 for the repairman to come out,” he says. “Then he said it was excluded because the condenser coils were dusty.”
In my experience, the warranty dictates which repair company comes to your house: You don’t have any say in that. Do you have a trusted plumber, electrician or appliance service? If so, it’s another reason that a home warranty may not be for you.
4. Rental car insurance
Call your insurance company before you rent to see whether your coverage includes rental cars. Most do, but it depends on your policy. Make sure you tell the insurer what type of vehicle you are going to rent — from my experience, it can make a difference.
Do you plan to pay for the rental with a credit card? Many cards give you rental-car insurance of some sort, according to the Insurance Information Institute.
In decades of business travel, working with many car insurers and car rentals, I have never found that I needed additional insurance from the rental car company.
5. Air travel insurance
In some cases, this coverage can make sense. Travel insurance can minimize the financial risks of traveling: accidents, illness, missed flights, canceled tours, lost baggage, theft, terrorism, travel-company bankruptcies, emergency evacuation, and getting your body home if you die, says travel expert Rick Steves.
Travel insurance often totals between 4 and 8 percent of the cost of your trip, but can go as high as 12 percent, depending on the plan you choose, according to Travel Insurance Review.
Steves says your insurance needs depend on the specifics of your trip, including:
- Whether the trip is prepaid
- Whether your ticket is refundable
- Where you’re traveling — for example, Norway or Nigeria?
- The financial health of your tour company and airline
- Your own state of health and the value of your luggage
Finally, it depends on whether you already have coverage through your medical insurance, homeowners or renters insurance, and/or credit card.
6. Pet insurance
This is another tough call: Most people consider pets to be part of the family. Veterinary bills can be high, and insurance can be a good call in certain circumstances.
“There’s no magic formula that will tell you if it’s right for you and your pet,” according to the American Veterinary Medical Association.
The AVMA suggests you talk to your veterinarian about the general health of your pet. The age of the animal is also a factor.
If you do opt for pet insurance, first take a look at the AVMA’s guidelines for pet health insurance policies.
For more information see “4 Ways to Keep Your Pet Away From the Vet.”
7. Cellphone insurance
In speaking about cellphone insurance, Stacy says, “If your phone is super expensive and you’re super likely to lose it, it could be worth it.”
However, if your problem is dropping your phone, you could instead invest about $10 to get a shatterproof cellphone screen cover — essentially tempered glass that is very difficult to break.
So, unless you tend to drop your phone in water, you probably don’t need insurance, according to iGrad.com. The average cost is around $5 a month and there is usually a fairly high deductible.
If you’re still interested, check first to see whether your phone has a warranty and what it covers, and make the decision from there.
For more detail on this subject, see “Why Cellphone Insurance Is Not Worth the Cost,” which illustrates that in some cases, premiums and deductibles are greater than the cost of replacing the phone.
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