Insurance, at its best, 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 theft promptly. Says the Federal Trade Commission:
Your liability 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, you are not responsible for any unauthorized use.
Most card companies go a step further and offer $0 fraud liability.
Report an ATM 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 60 days go by after your bank sends a statement with unauthorized purchases, you could face unlimited liability, the FTC says.
In 2014, only 14 percent of identity theft victims paid $1 or more out-of-pocket, says a U.S. Department of Justice report. “Of these victims, about half suffered losses of less than $100,” it says.
Repairing your credit and damage to your identity, on the other hand, can be time-consuming and costly. The National Association of Insurance Commissioners says:
[I]dentity theft insurance provides coverage for the cost of reclaiming your financial identity, such as the costs of making phone calls, making copies, mailing documents, taking time off from work without pay (lost wages) and hiring an attorney.
Identity theft insurance may cover those costs. Or it may not. Policies vary. Questions to ask: Can you recover lost wages from time away from work? What will the company do to reclaim your identity for you? Read the exclusions, limits and deductibles to decide if a policy is worth it.
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 and can’t be declined. 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.
The FTC advises borrowers to resist lenders’ sales pressure. You can’t be denied credit for declining optional credit insurance. If someone tries, report them to your state attorney general (find yours here) or state insurance commissioner (click your state on the map or select it from the drop-down menu).
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, does 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.
The New York Times recommends a one-stop site, InsureMyTrip, for policies, articles and detailed information about what products cover. Travel Insured International is another site for comparison shopping, Forbes says.
Expect travel insurance to cost about 4 percent to 10 percent of the cost of the trip, depending on how comprehensive the plan is, says The Simple Dollar. It recommends six companies and urges readers to look for exclusions and loopholes in policies.
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.” Examples:
- The traveler, or a family member back home, is in precarious health or elderly and fragile.
- 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.
- A hitch in child care arrangements could force you to cut short or cancel the trip.
- Airline connections are tight and missing one of them could set you up for significant costs.
- Prepaid trips where a big deposit is on the line.
- You’ll just sleep better knowing you’re covered and are happy to pay for peace of mind.
Another travel-related precaution: Medical and/or evacuation travel insurance:
- Medical insurance covers your care abroad when your medical plan doesn’t. (Medicare, for one example, does not cover Americans outside of the United States.) First, call your medical plan to find out what it does and doesn’t cover.
- Emergency evacuation coverage flies you home if medically necessary — a good idea if your trip entails risky activities (climbing or trekking, for instance) or if your health is fragile. But policies with lots of exceptions and exclusions may be a waste of money.
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, like lost luggage, theft and life coverage.
4. Dental insurance
If you have dental insurance through work, you’re golden. Otherwise, a plan can run $50 a month or more for benefits that top out at as little as $1,000 a year. 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.
The problem is the yearly cap on payouts. Dental plans haven’t raised these maximum payouts over the years, even though the premiums keep growing.
Affordable Care Act dental coverage: Dental coverage is optional under the rules of the federal law also known as Obamacare, but it can be purchased. The Affordable Care Act requires some health insurance plans to include affordable dental care for children. Some states allow insurers to offer family dental plans too. Healthcare.gov describes the ACA dental options.
- Discount dental plan: NerdWallet says discount plans charge “an enrollment fee of about $80 to $120 each year to get discounts ranging from 10 percent to 60 percent on all of your dental visits and procedures.”
- Charitable clinics: Free or low-cost care by volunteer dentists is offered periodically at community events. Check Dentistry From the Heart, America’s Dentists Care Foundation or find your state’s dental association online.
- Dental schools: Many dental schools provide free or reduced-cost care. Accredited programs are listed at the American Dental Association website.
- 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.
- Medical travel: Some Americans travel long distances for dental care abroad, particularly in Mexico. They can often find care that’s comparable in quality but considerably cheaper than at home. Medical travelers typically “need a lot of work, like 10 or 20 crowns,” Dr. Jessica Nitardy, who lives in El Paso, Texas, and practices in Ciudad Juarez, Mexico, tells The Atlantic.
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, for a couple of examples. Some advocate coverage for possible funeral expenses and time off work for grieving.
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. If necessary, you could use those funds to pay his death expenses without giving a penny to insurers.
6. Permanent life insurance
Life insurance is valuable when people who depend on your income would be financially hurt if you die. But if you don’t need to leave a pile of cash to pay off a mortgage or to leave a bequest, skip it.
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 in a solo crash, no matter the cause.
Older cars lose value fast. (Check values at Kelley Blue Book.) Suppose your car is worth $3,000, and the collision coverage alone runs $500 per year. If you total the car — and it won’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. It’s generally mandated by law, and beyond that, if you hit someone else, you’ll need it to pay the other guy’s costs.
Alternative: Put the amount of what would go to premiums into savings to buy 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’s already an international standard in place for paying your heirs (the airline foots the bill) if you are killed in a crash. Other rules apply if you are just injured (once again the airlines, though others may also be at fault).
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
Roughly a third of workplaces offer critical illness insurance, which helps with high deductibles and other out-of-pocket costs of treatment for certain acute illness, says MarketWatch. Employers do not contribute to these plans. The payments for basic policies are modest, and so are the benefits. For added coverage, you’ll pay more and have to pass medical screening.
Through a sample MetLife policy, a 50-year-old would pay $25.80 [monthly] for $15,000 of coverage for cancer, heart attack, stroke, kidney failure, major organ transplants, and 20-some additional diseases, including ALS (also known as Lou Gehrig’s disease), but excluding the very common diabetes.
The payout is a lump sum that you use for out-of-pocket medical costs or related expenses — medical travel, for example.
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 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. 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 gal 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. 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’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.
For more information see “4 Ways to Keep Your Pet Away From the Vet.”
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.
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.
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.
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