At its best, insurance helps protect against events that could send your finances into a death spiral. Crucial products include insurance against serious car crashes, the loss of or damage to a home, and the loss of income due to death or disability.
Other products? Many offer little value, or they’re filled with exclusions and caveats. Following are some potentially dumb insurance buys:
1. Identity theft insurance
Federal law limits your liability from credit card fraud, so even if a thief uses your credit card, you’re off the hook if you report the theft promptly. According to the Federal Trade Commission:
Under federal law, the amount you have to pay for unauthorized use of your credit card is limited to $50. If you report the loss to the credit card company before your credit card is used by a thief, you aren’t responsible for any unauthorized charges.
Most card companies go a step further and offer $0 fraud liability.
Report a debit card missing within two business days after you realize it’s gone, and you are liable for no more than $50 in stolen money. Wait longer to report, and you could be responsible for up to $500 in purchases. If you let more than 60 days go by after your bank sends a statement with unauthorized purchases, you could face unlimited liability, the FTC says.
Repairing your credit and damage to your identity can be time-consuming and costly. The National Association of Insurance Commissioners says identity theft insurance typically costs between $25 and $60 annually:
Identity theft insurance cannot protect you from becoming a victim of identity theft and does not cover direct monetary losses incurred as result of identity theft. Rather, this coverage pays for expenses related to reclaiming your financial identity, such as lost wages, attorney fees and documentation reporting.
Alternative: Protect yourself before you’re hit. Monitor your bank and credit accounts regularly. Get three free annual credit reports. If you think your identity has been compromised, place a 90-day fraud alert on your credit file.
2. Credit life insurance
You may be offered credit life insurance when you obtain a car loan or a mortgage. It pays all or part of your loan balance if you die. The beneficiary is your lender, not your family.
Occasionally, it is built into the loan. Most often, though, it is a separate and optional purchase. The Federal Trade Commission warns consumers to beware of lenders slipping it into a purchase without asking. That’s illegal.
You may encounter other types of credit insurance:
- Credit disability (or accident and health): It covers loan payments if you can’t work because you are sick, injured or disabled.
- Involuntary unemployment (or loss of income): It covers loan payments if you are out of work involuntarily — a layoff or termination, for instance.
- Credit property: It protects the property you used to secure the loan — your home, for example, in the case of a mortgage — against damage, loss in an accident, disaster or theft.
The value of these products depends on the price and your situation. Is your job insecure, for example? Is your health or mobility at risk? Also, would it really make all of your payments or only partial ones?
Alternative: Compare the price of term life insurance. “Regular term life insurance is usually much cheaper in the long run,” says Money Talks News founder Stacy Johnson. Also, you may be able to get disability insurance through your workplace.
3. Travel insurance
Travel insurance can be confusing. There’s protection against canceled trips, interrupted trips, medical expenses and many other risks. Policies vary in quality and in coverage. Some cover many eventualities. Others insure against a single risk, like a medical evacuation.
Travel insurance is a waste of money when:
- Your policy is riddled with exclusions.
- You choose a policy that doesn’t cover the risks you are likely to encounter.
- You buy coverage for risks you aren’t likely to encounter.
- You only stand to lose the cost of the airline ticket cancellation fee.
When is it worthwhile? Travel insurance makes sense if you anticipate unusual risks, beyond the broad fear that “anything could happen.” For example, perhaps you — or a family member back home — is in precarious health, or elderly and fragile.
Or maybe the trip involves a bigger-than-usual possibility of a major disruption — traveling in the tropics during hurricane season, for example, or visiting a country prone to political unrest.
Alternatives: You may already be covered for some of these situations through your homeowners, life, auto or health insurance. Credit cards also may offer some forms of travel insurance, such as lost luggage, theft and life coverage.
4. Dental insurance
If you have dental insurance through work, you’re golden. If you have to buy your own policy, however, don’t buy it thinking you’ll collect thousands of dollars’ worth of implants or other complex treatments. Your policy might just pay 50 percent for oral surgery and restorative care. It may not cover cosmetic dentistry at all.
Dental coverage is optional under the rules of the Affordable Care Act, the federal law also known as Obamacare, but it can be purchased. The law requires some health insurance plans to include affordable dental care for children.
Alternatives: A discount dental plan can get you discounts ranging from 10 to 60 percent on all of your dental visits and procedures. Other options for cheaper dental care include charitable clinics and dental schools.
Also consider federally qualified health centers. These private clinics receive some government funding. Find clinics in cities and rural areas across the country on the federal Health Resources and Services Administration website.
5. Children’s life insurance
Adults buy life insurance coverage for themselves to provide for their families in case they die. Arguments in favor of taking out life insurance on children include locking in insurance for them at a young age in case it becomes impossible or too expensive to insure them later because of illness or playing high-risk sports. Some advocate coverage for possible funeral expenses.
But unless the family depends on the child’s income, there’s no need to insure his or her life.
Alternatives: Save for the child’s education or open an investment account for him or her. If necessary, you could use those funds to pay for death expenses without giving a penny to insurers.
6. Permanent life insurance
Life insurance is valuable when people depend on your income. But if you don’t need to leave a pile of cash to pay off a mortgage or for other purposes, skip this coverage.
There are two main types of life insurance:
- Term life insurance covers you for a specified period — 10, 20 or 30 years, for example. It’s the cheaper option by far.
- Permanent insurance covers you for life. The insurance company takes part of the extra premium and invests it. That gives your policy a cash value, like a savings account. However, permanent life insurance comes with high premiums and high fees.
Alternative: If you’re wealthy and need to leave a big chunk of money to pay your estate taxes, permanent insurance might be for you. Otherwise, it’s a dumb insurance buy, says Stacy Johnson. He suggests term life insurance instead. Do your investing elsewhere.
7. Collision coverage on an old car
The collision portion of your auto insurance policy pays for repairing or replacing your car when the crash is your fault.
Older cars lose value fast. Suppose your car is worth $3,000, and the collision coverage alone runs $500 per year. If you total the car — and it wouldn’t take a huge wreck to incur $3,000 in repairs — the policy may pay even less than $3,000. Ask yourself: Is $500 a year worth it? In many cases, it is not.
Do not, however, drop your auto liability insurance. That coverage generally mandated by law, and beyond that, if you hit someone else, you’ll need it to pay the other driver’s costs.
Alternative: Take the amount you normally would spend on insurance premiums and put it into a savings account to help pay for your next car.
8. Flight accident insurance
Flight accident insurance pays a lump sum benefit if you are killed or maimed in a plane crash. But there is already an international standard in place for paying your heirs — the airline foots the bill — if you are killed in a crash.
Alternatives: Term life insurance. Also, some credit cards include flight insurance coverage when you buy a plane ticket using the card.
9. Critical illness insurance
Many workplaces offer critical illness insurance, which helps with high deductibles and other out-of-pocket costs of treatment for certain acute illnesses. The payments for basic policies are modest, but so are the benefits. For added coverage, you’ll pay more and have to pass medical screening.
The problem with these policies is that the insurer and you may not agree on what’s a critical illness. Definitions are very specific, and exclusions can be hidden in the policy’s fine print. Also, payout amounts shrink as you grow older.
Alternatives: If you have a qualifying high-deductible medical insurance plan and the discipline to save, open a health savings account. Your tax-free savings then are available for many more types of medical care and there’s no need to meet an insurer’s definitions of illness. For more on HSAs, check out “More Americans Are Using This Tool to Save — Should You Join Them?”
Or, buy disability insurance to cover 60 to 70 percent of your earnings. It’s more expensive but covers many more eventualities.
10. Rental car insurance
If you have full insurance coverage on a car of your own, you probably don’t need rental car coverage, no matter what the person behind the rental car counter says. Go ahead and waive it.
Alternatives: Make certain you are covered under your own auto policy. Your credit card also may have coverage if you pay for the rental with the card. Finally, car rentals may be covered by an umbrella home-life-auto policy.
11. 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. In some cases, the salesperson also gets a hefty cut of every warranty sold.
12. Home warranties
Consumers frequently expect more than these plans deliver and end up frustrated. Read “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’s 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.
13. 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.
14. Cellphone insurance
In speaking about cellphone insurance, Stacy Johnson 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 a tendency to drop your phone, you could instead invest about $10 to get a shatterproof cellphone screen cover — essentially, tempered glass that is very difficult to break.
What’s your experience with insurance offers that crop up in day-to-day transactions? Share with us in comments below or on our Facebook page.
Marilyn Lewis and Hiram Reisner contributed to this post.