My Insurance Buying Guide is now up! You can access it in the header at the top of any page.
It’s impossible to insure ourselves against every type of risk we’ll face in life. Even if we could, when it’s over we’d be broke. Learning which risks to accept will help your sanity and your wallet at the same time.
Last week I covered 5 types of insurance that make sense for most people. This time I have 8 types of insurance to avoid:
Retailers like to sell this stuff like hotcakes on everything from digital cameras to office chairs. In fact, this is probably the insurance type you’ll be sold most often on this list. When should you buy an extended warranty? Never. The payout is generally between 9 and 12 cents on the dollar, meaning that for every dollar you pay into these policies you’ll get 9-12 cents in benefits. The other 88-91 cents lines the pockets of the salesperson.
Some people argue that extended warranties make sense for electronic gadgets. But new technology causes electronics to depreciate rapidly, so in the unlikely event your gadget breaks a couple years down the road you’re better off paying out of your own pocket to repair or replace it.
Life insurance for kids
I cringe when I hear about people who waste money buying life insurance on their kids. The purpose of life insurance is to provide a financial benefit to your dependent survivors in the event of your death. Nobody depends on your kids for income, so they don’t need life insurance.
Credit card payment protection
This insurance will make the minimum payment on your credit card if you lose your job, get sick or injured, or die. The cost is based on your balance – the higher your balance the higher the premium. As an alternative, get disability insurance which covers your minimum payments. Building an emergency fund is also a good strategy.
I’ve heard of credit card companies adding this garbage automatically to peoples’ bills each month. So check your statements to make sure you aren’t being charged.
ID theft insurance
Buying insurance to protect yourself from identity theft is reactive. ID theft insurance doesn’t protect you from becoming a victim – it simply pays for some of your expenses (legal fees and mailing letters to creditors) after you’ve become a victim.
But you want to be proactive. There’s a better way to protect yourself, and that’s freezing your credit files. This prevents anybody from applying for credit as if they’re you, and is the best thing you can do to prevent ID theft. It’s easy to do online and costs very little ($30 or less; free in some states).
Cell phone insurance
These policies are supposed to protect you if your phone is lost, stolen or broken. You pay a deductible (usually $50 or $100) and get a second-rate phone to use in place of your original one. The cost? About $5 to $7 a month. The problem is these policies have so many limitations that it’s difficult to make a claim. Most won’t cover you if there’s water damage, for example.
Unless you’re extremely accident-prone, this insurance is unlikely to be useful to you. Most smartphones come with a warranty, so check that first.
Unless your pet is older and goes to the vet several times a year, skip this insurance. Instead, put the money you would have paid for premiums into a savings account to use if your pet needs treatment.
Home warranties supposedly give you peace of mind if your appliances break and need expensive repair. The typical policy costs $500 a year plus a deductible. But companies that sell this junk think up all sorts of reasons to deny you coverage, and they are notoriously difficult to deal with. You’re only allowed to use their contractors, who may not be able to schedule you in for weeks. Instead, start a home repair fund and give yourself the flexibility to find the best person for the job.
Mortgage life insurance
This is designed to pay your mortgage payment if you die or become disabled. But do you know what banks call it behind our backs? “Croak and choke” insurance. Like credit card payment protection, it only protects the bank. Make sure you have adequate life insurance and disability insurance to cover your mortgage.
Photo by jmpetresort.com