"Add-on" insurance, the CFA warned, tends to be outrageously overpriced, typically involves kickbacks to sellers and is often unnecessary. For example, collision insurance policies sold by car rental agencies are often many times more expensive than regular policies. Your existing auto insurance policy or credit card probably already covers the risk, the group says.
"In our experience, insurance offered to you in conjunction with the sale of other products is often not needed or, if needed, can be purchased much less expensively from other sources," said J. Robert Hunter, CFA's director of Insurance and former Texas Insurance Commissioner and Federal Insurance Administrator, in a statement.
Hunter said add-on sales involve "reverse competition," in which the seller of a product such as a camera or car invites insurance companies to compete for the biggest kickback. The seller invariably accepts the highest bid, which Hunter said can sometimes more than double the cost of the insurance.
"When you find yourself buying insurance you did not plan to buy, watch out," Hunter said. "The person selling the insurance usually is being paid a commission or other financial inducement which drives up the price, making the insurance relatively expensive."
The CFA highlighted several types of add-on insurance consumers may wish to avoid altogether due to expense or lack of necessity:
Credit/Debt Cancellation Insurance
This kind of add-on insurance is offered when buying furniture, a car, a home or anything else requiring a loan. Credit or debt cancellation insurance covers death, illness or injury, loss of job and family leave, and frequently pays low benefits -- on average less than 40¢ per premium dollar.
Home buyers are faced with two types of title insurance policies, a lender's policy and an owner's policy. The owner's policy protects the buyer, while the lender's policy (which is also paid by the buyer) protect the lender. The CFA says numerous studies have demonstrated how title insurers offer kickbacks to real estate agents to steer business their way, which is why the CFA advises home buyers to shop around for title insurance.
Travel agents usually try to sell travel insurance when booking a vacation. Their commissions can push the payout ratio to below 50% of the premium. Travel insurance policies are also notoriously complicated and often impose severe restrictions on what they actually cover. Some concerns, such as death and lost luggage, are probably covered by life and homeowners policies.
Car Rental Insurance
Supplemental collision insurance offered by car rental agencies, the CFA says, can run more than ten times the cost of regular insurance. It also usually is unnecessary, since 60% of auto insurance policies cover rental car collisions, as do many major credit cards.
When offered the opportunity to purchase add-on insurance, the CFA advises the following:
- Be cautious and take your time. Don't succumb to pressure to buy insurance right away. Ask for information to take home with you, including a copy of the policy describing what's covered as well as the price.
- Once home, decide if you really need the insurance. Ask yourself what is it you want to protect, read the policy and see if it actually offers such protection. Also make sure to check if you are already protected under an existing policy, such as life, health, disability, home or auto insurance -- and remember, you can't collect twice for the same claim from two different policies.
- If you decide you really need additional insurance, shop around for the best price from an insurance company. Make sure to compare prices via the Internet.