There are types of insurance that Americans don't buy enough – renters insurance, disability insurance, long-term care insurance, flood insurance. Then, there are others that we buy way too frequently and are, for the most part, a waste of money.
Today, I am more worried about the latter -- and there is good reason to be concerned. This morning, the New York Times published an op-ed column by Nobel Prize-winning economist Paul Krugman who wrote: "We are now, I fear, in the early stages of a third depression." Hammering that point home, more than one million people are expected to lose their unemployment benefits this week.
For most Americans, these are scary times and any extra money we have floating around can certainly be put to better use. So when it comes to that part of your budget earmarked for insurance premiums, here are the policies you should consider avoiding:
Credit life insurance. This is life insurance that's tied to a purchase you've financed -- expensive appliances, maybe, or a car – and in general, it's not a good buy. "Statistically, it doesn't pay out that often, and it only pays off the balance of what you're financing. So say you bought a big set of appliances and you purchase credit life. If you pass away, and the balance on it is $500, that's what credit life pays," says Amy Danise, senior managing editor of Insure.com. This type of coverage is really cheap, which is why it's attractive to people. Instead, put the money into paying off your purchase faster, and save on interest. That's an investment that pays off every time.
Mortgage life insurance. Similar to credit life insurance, this insurance pays off the balance of your mortgage if you die before you're able to pay it off yourself. Once you purchase a home, you'll be offered mortgage life, not only when you sign for the mortgage, but also through the mail so frequently it gets annoying. (Trust me. I know.) Your lender is the beneficiary of the policy, which means they get the payout. Instead, you need life insurance, specifically a good term-life insurance policy, that will provide for children, a spouse, or anyone else dependent on your income. If you purchase one in the correct amount, your beneficiary will be able to pay off your mortgage with money left over for other expenses.
Children's life insurance. "This is often marketed to grandparents as a wonderful gift to give a grandchild. The sales pitch is that if the child has a chronic illness when he gets older, he'll be otherwise uninsurable, so he'll already have a whole life policy locked in place," explains Danise. But chances are, when your child becomes an adult and needs life insurance, he or she will be able to purchase it then. (Often in the form of inexpensive group life through an employer.) The real risk is purchasing a policy when a child is born and throwing that money for premiums away for decades, when you could be saving it for your own retirement or the child's college education.
Credit card insurance. This is pitched as a safety net if you lose your job, are unable to work because of an illness, or are otherwise unable to pay your credit card bill, but it's largely a huge waste of money, says Edgar Dworsky, a consumer lawyer and founder of ConsumerWorld.org. "You wind up paying a pretty penny for not an awful lot of coverage. You'd be better off if you had a disability insurance policy, because it would pay much more for a longer period of time than these finite things." Even if your inability to pay doesn't fall under a disability policy, credit card companies will generally work with you after a job loss, and you can always enlist the services of a non-profit credit counselor. Find a good one at debtadvice.org.
Extended warranties. The general advice from Consumer Reports and other experts is that you don't need these. Very often, you're paying $60 to $100 for coverage that lasts an additional year or two, which means the appliance or electronic you've purchased is still in its prime when the coverage expires. Still, there are some instances when you may want to lay out for the extra protection. "You have to think about what the cost would be if you needed a repair, and what the likelihood of needing that repair is for a particular product, keeping in mind that you get an extra year's warranty for free with most platinum or gold credit cards," explains Dworsky. (Note: I make an exception in this case by purchasing AppleCare for my MacBook. That not only covers the hardware and software on my computer, it also provides technical help when I need it, which makes it worth the cost ($249 for three years) in my eyes.
Comprehensive and collision on auto insurance. Collision pays for the damage to your car, no matter who is at fault, and comprehensive pays for fire, theft and vandalism, so this one comes with a caveat, right from the start – often, you do need it, particularly if your car is new or still rather valuable. But most people pay their auto insurance bills year after year without giving them a second thought, and that's a mistake. "People don't always review their insurance annually, which is the suggestion, and so they continue to carry comprehensive and collision coverage on their auto policies, even with the car is older and doesn't have a lot of value. At that point, the pay off on the car would be pretty low," explains Danise. If your car is more than five years old, it's a good idea to start monitoring what it's worth – you can get an estimate online from Kelley Blue Book. That way, you can figure out if the premiums for this additional coverage are worth it.
Travel insurance. These policies will generally pay out if you've put down non-refundable deposits – on a cruise or hotel room, for example – and are unable to make your reservation because of sickness, a flight cancellation or delay, or job loss. I'd say they're worth it if you're going on a cruise and poised to lose a great deal of money, or if you're traveling with a person with health issues. But if you haven't put down non-refundable deposits, or if the cost of the trip is modest, you can skip travel insurance without a worry.
Rental car insurance. If you own your own car, you're likely already covered. So purchasing this policy from your car rental company at check-out means you'd be doubling up. "Your car insurance probably extends to a rental car, so you're buying extra if you check that box. The only reason to do that is if you did crash, you wouldn't have to make a claim on your own policy." This, too, could become a non-issue though if you're renting with a credit card that provides coverage. Most do, and you won't have to make the claim through your auto policy, which could cause an increase in premiums. Call both your credit card company and your auto insurer to learn about your options.
Roadside assistance from your insurer. When you purchase auto insurance, you have the option to add this and towing to your policy, which means you'd be covered if you're locked out or your car breaks down and you need a tow to the nearest auto shop. This extra is generally very cheap, but cost isn't the issue here – Danise says that when you take advantage of the coverage, it goes on your claim record, which could increase your premiums. You want to keep your record as clean as possible, so you're better off paying for your own tow truck or roadside assistance when you run into trouble.
Private mortgage insurance. PMI is tacked onto your monthly mortgage payment to protect the lender, not you, if you're unable to make your payments. PMI is required if your down-payment is less than 20% of the home's value, because that makes you a "high-risk" borrower in the eyes of your lender. Waiting until you can scrape together enough money to put down the full 20% may be well worth it, but if you don't want to, make sure the PMI coverage is canceled once you owe only 80% of the purchase price or the appraised value, whichever is less.
Jean Chatzky, award-winning journalist and best-selling author, is the financial editor for NBC's Today, a contributing editor for More Magazine, and a columnist for The New York Daily News. She blogs daily at JeanChatzky.com. She is the author of seven books, including her newest, Money 911 (a New York Times best seller) and recently launched an online program, The Debt Diet, to help people pay down their debt on $10 a day.
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