Seven Insurance Policies That Aren't Worth the Money
Jan 18th 2011 11:00AM
Updated Jan 18th 2011 11:49AM
"Insurance is meant to protect against the really big stuff that rains down upon you," insurance agent Alan Canton tells WalletPop.
But even Canton, and a handful of other insurance agents WalletPop spoke with, know that not all insurance policies are created equally. Here are seven policies they say aren't worth the money:
These "limited benefit" health insurance plans have been blasted by Congress for offering very little coverage to policyholders. Often, these policies are sold to people who can't afford major medical insurance, such as part-time or migrant workers. McDonald's, which offers these plans to tens of thousands of workers, recently argued that many of its workers would likely have no health coverage if it weren't for these plans.
Buyers should know that these policies are best used for minor cuts and scrapes. And while they don't carry a deductible, they do have spending caps, so a $10,000 surgery likely won't be covered, says Canton. Typically, mini-med policies cost $50 a month.
Accidental Death and Dismemberment
Free or low-cost policies offered by employers usually cover accidents involving a death or dismemberment, so there's no need to buy it on your own, says Joan Antoniello, vice president for personal and corporate insurance planning at Weiser Capital Management.
And while the average $15 a month that these plans cost is low, the premiums add up (to about $180 a year) -- money that could be better spent on doubling a death benefit or some other type of insurance, she says.
Larry King may have wanted to get this coverage, but for most people, the cost versus benefit doesn't make economic or emotional sense, says Justin Reckers, a certified financial planner. Do you really want to start a marriage by planning for failure?
The website Wedlock Divorce Insurance makes it sound reasonable, citing that more than half of all families go through divorce every year and end up below the poverty line, losing 77% of their total net worth. The site even has a divorce probability calculator and divorce cost calculator.
According to Reckers, Wedlock sells coverage in units, with $1,250 in coverage costing $15.99 per month. Policies mature in 48 months, meaning benefits won't be paid until after four years as a way to discourage people who are contemplating divorce from buying the insurance and quickly collecting. Buying the maximum $1.25 million in coverage will cost $767,520 in premiums by the time the benefits are payable after 48 months.
Comprehensive or Collision Coverage for Old Cars
Of course, you want to keep your car insured (it's the law in most states), but beyond the minimum requirements, there's often no need to get comprehensive or collision coverage for a car with a very low Kelley Blue Book value, says Joel Ohman, a certified financial planner and founder of CarInsuranceComparison.com. Collision covers the cost of replacement and repairs after a typical car accident, while comprehensive not only covers those things but also covers non-collision events like fire, theft, vandalism and falling objects. Such coverage is often required by lenders, but once the car is paid off and the car's value has dropped, many people forget to stop paying for the coverage, Ohman said.
A good rule of thumb, says Ohman, is that if collision and comprehensive coverage add up to more than 10% of the car's KBB value, then turn the coverage down.
Car Rental Insurance
If you already have car insurance then CPA Steve Elliott says don't buy it at the car rental counter. Your existing policy should cover you if something goes awry.
There are times when car-rental insurance may make sense, however. CBS MoneyWatch's Ray Martin points out that while your existing car insurance or credit cards may already cover a rental car, it's a good idea to opt for the insurance if you're driving outside the country or have high deductibles for personal effects stolen from the rental car.
Term Life Insurance
Some insurance agents may disagree, but Canton says term life insurance can be a big waste of money. In his opinion, term life is like renting a home; it's a "wasting asset." Whereas whole life insurance, while more expensive, is like buying a home. With a whole life policy, part of what you pay is a set amount that goes into a "forced savings" account where you earn interest or dividends and can even borrow against at low interest rates. Term life runs until the end of the term and then it is done -- unless you renew the policy at a very high cost.
Most people buy enough term life insurance coverage for 10 to 20 times their gross income, so someone earning $50,000 a year will typically get $500,000 to $1 million in term insurance, says Canton. Getting $500,000 in term life insurance for 30 years will cost a 56-year-old man about $500 a month, depending on his health, where he lives, the insurance carrier, and any riders (options) that he might have added to the policy, explains Canton.
Whole life insurance, on the other hand, is usually about seven or eight times more expensive than term life insurance, which is a big reason why more people opt for term life. Whole life insurance is basically a cash account that builds up over time. The cash can be borrowed by the owner of the policy or it can be taken as a lump sum if the owner surrenders the policy. After a number of years the cash value will come close to equaling the amount the buyer paid, so it is often said that whole life becomes "free" if it is held long enough. Term insurance builds no cash value. It only has a death benefit, which is only paid if the insured dies while the policy is still active.
According to Canton, about 92% of all term insurance policies never pay a benefit because people lapse (give up) the policy before they die. That's one of the reasons why term insurance is cheaper; carriers know they only have to pay out on about 8% of policies, says Canton.
For a small minority of people who are investment savvy and who believe they will not need coverage later in life, buying term and investing the rest of the money they would have spent on a whole life policy might be a good option, Canton says. For the vast majority of people, however, whole life is a better option because they can be assured that they will have a guaranteed nest egg in their golden years.
While Canton doesn't recommend term life insurance, Travis Freeman of Four Seasons Wealth Management says, next to mortgage insurance, term life may just be worth it. Mortgage insurance is basically life insurance meant to pay off a home in the event of a tragedy, Freeman explains.
However, mortgage insurance is typically 200% to 300% more expensive than term life insurance, Freeman says. Someone with a $100,000 mortgage, for example, would spend two to three times more on mortgage insurance for that amount than they would if they bought a term life policy for $100,000 in coverage for 30 years. Also, with mortgage life insurance, the money is typically paid directly to a mortgage lender instead of to your family.
Freeman does, however, recommend mortgage insurance for people who have an illness or medical history that may cause traditional term life insurance to be more expensive.
Aaron Crowe is a freelance journalist in the San Francisco Bay Area.