Insurance You Can Do Without

INSURANCE

Dan Phelps

Decision Center

..........................................

BACK TO MAIN

Understanding Your Overall Insurance Needs

So what kind of insurance may be a bad deal? Here are 11 worth skipping.

1. Private mortgage insurance

This is something that hits about a quarter of all homebuyers. When you buy a house, the mortgage company wants to make sure it won't be hurt too badly if you skip town without paying off the loan. Unless you can put down at least 20 percent of the home's value, you may have to get PMI. The policy benefits nobody but the lender and can be so expensive that a year's worth of premiums can add up to a 13th mortgage payment.

Once you have at least 20 percent equity in your home, get the bank to drop the policy. It's easier said than done, since the bank will likely make you pay to have the house appraised to prove you have enough equity. And that can run as much as $300.

2. Service contracts

These "extended warranties" are usually worth skipping. A service contract is simply a promise to perform or pay for certain repairs or services. Service contracts often duplicate what's provided in the standard warranty you get with a car or an appliance. Read your regular warranty carefully, then compare it to the service contract. Sometimes, you can purchase service contracts later, when the original warranty expires.

3. Separate policies vs. riders

Buying separate policies to cover things like boats or RVs may not be your best choice. While some policies provide added liability coverage and other features, check out if supplemental coverage is already available through your existing homeowner's policy.

A major reason is cost. Think of it as buying in bulk. When you add a "rider" to an existing policy, it usually costs less than trying to buy a whole new policy. Also, many of these "things that move" are already covered by your home insurance, albeit at less-than-ideal levels.

4. Flight insurance

This coverage is pretty cheap. Tele-Trip Co., a subsidiary of Mutual of Omaha, sells $500,000 of coverage for $16.65, and you can get $100,000 of coverage for a measly $3.75. According to some statisticians, you could fly on a major airline every day for 26,000 years before you'd be involved in a plane crash. Even then, the odds are that you'd survive that crash. It's a big moneymaker for the insurance company. American Express offers cardholders $1 million in coverage for just $14. If every passenger who flew on a scheduled U.S. commercial flight in 1995 paid $14 for a $1 million flight insurance policy, and the insurance company paid $1 million for every person who died in a plane crash that year, the company still would have made $7.4 billion.

Besides, you may already have flight insurance, if you purchased your plane ticket with a credit card. Some credit card companies give you $100,000 in coverage just for charging your ticket on their card.

5. Credit insurance

This insurance is often pushed on consumers. The most important thing to remember about credit insurance is that a lender cannot make you buy it.

While there are several variations (including credit life insurance, credit health or disability insurance and credit unemployment insurance), they all do the same thing: they pay the lender if you can't. So why would you want to pass on credit insurance? Well, for one reason, you might have enough life insurance, disability insurance or assets to cover your debts. Besides, you might be able to buy a term life insurance policy for less, and the payout would be higher. If a 30-year-old Oregon woman in good health takes out a five-year, $5,000 loan, credit insurance would cost $112.50. The cost of the credit insurance is added to the total loan amount. If this same woman already had a $50,000 term life insurance policy, and tacked on another $5,000 to cover the loan, it would add less than $15 to what she already pays for the life insurance policy over the five-year loan period.

Even if she buys a new term life policy, it would cost her about $500 for five years of at least $50,000 in coverage (that's usually the minimum coverage available). And remember, the credit insurance policy would only pay the lender whatever is owed.

Credit insurance is also a big moneymaker for insurance companies. In Louisiana, for example, insurers and lenders keep 79 cents of every dollar that consumers pay in premiums. Even in the best states (such as Maine and New York), the insurance companies keep about 40 cents of every dollar

6. Short-term, cash-value life insurance

If you don't hold onto them long enough, cash-value life insurance policies are wastes of money. Cash-value life insurance is designed to offer both a death benefit (the money paid to your heirs when you die) and a return on investment. While your survivors will still get the death benefit, these policies lose money in big chunks in the first few years.

According to a recent study by the Consumer Federation of America, it takes five years before one of these policies shows a positive return. And even then, that return is extremely small. Even after 10 years, the average return is only about 2 percent. All this is due to brokers' commissions and other fees paid in the beginning of the policy's life.

If you're looking for life insurance coverage for a short period, term life is your best bet. The premiums are much lower, and your heirs will still get the death benefit.

7. Life insurance for children

This insurance offers a big death benefit, but kids don't have debts or dependents. If you're thinking that a cash-value kid's life insurance policy would be a good way to save for his or her college education, you could do better elsewhere.

8. Mortgage insurance

It's more expensive than it's worth. Besides, you could do better with another policy - one that you might already have. These policies are designed to make your mortgage payments if you die or become disabled. If you're worried about burdening your heirs with mortgage payments, you'd be better off buying straight life insurance. Adding onto your existing life insurance policy is less expensive than mortgage life.

9. Disability insurance

If it's provided by your employer, it also offers better coverage than mortgage disability insurance.

10. Cancer insurance

In 1994, about 10 million Americans were covered by a "disease specific" insurance policy for cancer, heart disease or stroke. But if you look closely at what you get, you'll realize there's a better way: health insurance. Some cancer insurance policies promise to refund your premiums every 10 years if you've had no cancer. Not a bad deal - if you're the insurance company.

A study done by the federal General Accounting Office in 1994 found that the largest companies selling plans - that cover only hospital stays or diseases like cancer - paid out as little as 35 percent of the premiums they took in. Some states set payout targets of 75 percent or more for other policies. While $400 a year may not seem like too much to spend for peace of mind, it's the narrow coverage provided by cancer insurance that makes it a bad deal. They'll cover you if you get cancer, but some policies won't pay for cancer treatments until several years after you've bought the policy. Others require confirmation of the cancer by a pathologist, which sometimes is impractical or even impossible. And skin cancer, probably the most common form of cancer, is often excluded.

11. Short-term medical coverage

Don't bother. Often, this coverage is offered to those who leave one job for another. (Here's where you find out just how much your employer's been kicking in for your insurance coverage.) Under federal law, your old insurance policy can "follow" you for a limited amount of time, but you have to pay the whole premium. You can delay paying the premiums until after you actually need the coverage. (You will, however, have to pay the premiums for the previous months, too.) If you're healthy, you might be able to get away without paying at all.

What types of insurance do I need?

Articles

Twenty-five Secrets to Buying Insurance
The Raging Debate Over Term vs. Whole Life
How to Find Affordable Health Insurance
Auto Insurance: Buy More Than the Minimum
Homeowner's Insurance Protects More Than Your Home
Umbrella Policies Plug Holes in Your Coverage
Finding the Right Individual Health Plan

Next Steps

Go to Money's Lifetime Planner

			INSURANCE

			Insurance You Can Do Without Dan Phelps Decision Center

	.......................................... BACK TO MAIN Understanding Your Overall Insurance Needs		So what kind of insurance may be a bad deal? Here are 11 worth skipping. 1. Private mortgage insurance This is something that hits about a quarter of all homebuyers. When you buy a house, the mortgage company wants to make sure it won't be hurt too badly if you skip town without paying off the loan. Unless you can put down at least 20 percent of the home's value, you may have to get PMI. The policy benefits nobody but the lender and can be so expensive that a year's worth of premiums can add up to a 13th mortgage payment. Once you have at least 20 percent equity in your home, get the bank to drop the policy. It's easier said than done, since the bank will likely make you pay to have the house appraised to prove you have enough equity. And that can run as much as $300. 2. Service contracts These "extended warranties" are usually worth skipping. A service contract is simply a promise to perform or pay for certain repairs or services. Service contracts often duplicate what's provided in the standard warranty you get with a car or an appliance. Read your regular warranty carefully, then compare it to the service contract. Sometimes, you can purchase service contracts later, when the original warranty expires. 3. Separate policies vs. riders Buying separate policies to cover things like boats or RVs may not be your best choice. While some policies provide added liability coverage and other features, check out if supplemental coverage is already available through your existing homeowner's policy. A major reason is cost. Think of it as buying in bulk. When you add a "rider" to an existing policy, it usually costs less than trying to buy a whole new policy. Also, many of these "things that move" are already covered by your home insurance, albeit at less-than-ideal levels. 4. Flight insurance This coverage is pretty cheap. Tele-Trip Co., a subsidiary of Mutual of Omaha, sells $500,000 of coverage for $16.65, and you can get $100,000 of coverage for a measly $3.75. According to some statisticians, you could fly on a major airline every day for 26,000 years before you'd be involved in a plane crash. Even then, the odds are that you'd survive that crash. It's a big moneymaker for the insurance company. American Express offers cardholders $1 million in coverage for just $14. If every passenger who flew on a scheduled U.S. commercial flight in 1995 paid $14 for a $1 million flight insurance policy, and the insurance company paid $1 million for every person who died in a plane crash that year, the company still would have made $7.4 billion. Besides, you may already have flight insurance, if you purchased your plane ticket with a credit card. Some credit card companies give you $100,000 in coverage just for charging your ticket on their card. 5. Credit insurance This insurance is often pushed on consumers. The most important thing to remember about credit insurance is that a lender cannot make you buy it. While there are several variations (including credit life insurance, credit health or disability insurance and credit unemployment insurance), they all do the same thing: they pay the lender if you can't. So why would you want to pass on credit insurance? Well, for one reason, you might have enough life insurance, disability insurance or assets to cover your debts. Besides, you might be able to buy a term life insurance policy for less, and the payout would be higher. If a 30-year-old Oregon woman in good health takes out a five-year, $5,000 loan, credit insurance would cost $112.50. The cost of the credit insurance is added to the total loan amount. If this same woman already had a $50,000 term life insurance policy, and tacked on another $5,000 to cover the loan, it would add less than $15 to what she already pays for the life insurance policy over the five-year loan period. Even if she buys a new term life policy, it would cost her about $500 for five years of at least $50,000 in coverage (that's usually the minimum coverage available). And remember, the credit insurance policy would only pay the lender whatever is owed. Credit insurance is also a big moneymaker for insurance companies. In Louisiana, for example, insurers and lenders keep 79 cents of every dollar that consumers pay in premiums. Even in the best states (such as Maine and New York), the insurance companies keep about 40 cents of every dollar . 6. Short-term, cash-value life insurance If you don't hold onto them long enough, cash-value life insurance policies are wastes of money. Cash-value life insurance is designed to offer both a death benefit (the money paid to your heirs when you die) and a return on investment. While your survivors will still get the death benefit, these policies lose money in big chunks in the first few years. According to a recent study by the Consumer Federation of America, it takes five years before one of these policies shows a positive return. And even then, that return is extremely small. Even after 10 years, the average return is only about 2 percent. All this is due to brokers' commissions and other fees paid in the beginning of the policy's life. If you're looking for life insurance coverage for a short period, term life is your best bet. The premiums are much lower, and your heirs will still get the death benefit. 7. Life insurance for children This insurance offers a big death benefit, but kids don't have debts or dependents. If you're thinking that a cash-value kid's life insurance policy would be a good way to save for his or her college education, you could do better elsewhere. 8. Mortgage insurance It's more expensive than it's worth. Besides, you could do better with another policy - one that you might already have. These policies are designed to make your mortgage payments if you die or become disabled. If you're worried about burdening your heirs with mortgage payments, you'd be better off buying straight life insurance. Adding onto your existing life insurance policy is less expensive than mortgage life. 9. Disability insurance If it's provided by your employer, it also offers better coverage than mortgage disability insurance. 10. Cancer insurance In 1994, about 10 million Americans were covered by a "disease specific" insurance policy for cancer, heart disease or stroke. But if you look closely at what you get, you'll realize there's a better way: health insurance. Some cancer insurance policies promise to refund your premiums every 10 years if you've had no cancer. Not a bad deal - if you're the insurance company. A study done by the federal General Accounting Office in 1994 found that the largest companies selling plans - that cover only hospital stays or diseases like cancer - paid out as little as 35 percent of the premiums they took in. Some states set payout targets of 75 percent or more for other policies. While $400 a year may not seem like too much to spend for peace of mind, it's the narrow coverage provided by cancer insurance that makes it a bad deal. They'll cover you if you get cancer, but some policies won't pay for cancer treatments until several years after you've bought the policy. Others require confirmation of the cancer by a pathologist, which sometimes is impractical or even impossible. And skin cancer, probably the most common form of cancer, is often excluded. 11. Short-term medical coverage Don't bother. Often, this coverage is offered to those who leave one job for another. (Here's where you find out just how much your employer's been kicking in for your insurance coverage.) Under federal law, your old insurance policy can "follow" you for a limited amount of time, but you have to pay the whole premium. You can delay paying the premiums until after you actually need the coverage. (You will, however, have to pay the premiums for the previous months, too.) If you're healthy, you might be able to get away without paying at all.
			What types of insurance do I need?
			Articles \|

			Twenty-five Secrets to Buying Insurance The Raging Debate Over Term vs. Whole Life How to Find Affordable Health Insurance Auto Insurance: Buy More Than the Minimum Homeowner's Insurance Protects More Than Your Home Umbrella Policies Plug Holes in Your Coverage Finding the Right Individual Health Plan

			Next Steps \|

			Go to Money's Lifetime Planner Copyright 1998 Microsoft Corporation