Insurance policies to avoid: No need to cover your kids, your cruise or your clunker

When it comes to insurance, people often think that it's better to be safe than sorry, but often wind up spending more money than they should on coverage they don't need.

Besides wasting money, consumers sometimes don't buy enough coverage that they do need – and don't realize it until a disaster such as a flood occurs. Consumers also pay too much in premiums by keeping their deductibles low, even though they could afford the out-of-pocket expense if they filed a claim.

"The basic rule of insurance is to cover your big risks in life, and those would include your life, your health and your home and your car if you have one," said Greg Daugherty, executive editor of Consumer Reports, in an interview. "You can insure just about anything that you want."

People can take simple steps to save money on insurance, such as shopping around for the best deal. Companies also give discounts to customers who buy more than one type of coverage from them. The key thing for consumers to do is to make sure that they have coverage that's both comprehensive and geared toward covering catastrophic events that would cause economic hardship, such as the death of a spouse.

But the more exotic types of insurance are probably not a good idea for most people because their coverage isn't comprehensive and does not include situations that are catastrophic enough to cause severe economic hardship, according to Robert Hunter, director of insurance for the Consumer Federation of America. Here are a few of the more common types of insurance that Hunter and other experts believe people should avoid:

  • Life insurance for children – While losing a child is about the toughest thing that a parent can experience from an emotional standpoint, by and large it does not lead to economic hardship. "No one is depending on the baby's income or the child's income for continued survival," Hunter says. "Economically, it's not an appropriate thing to do."
  • Cancer insurance – One company selling these types of policies advertises that it provides "essential coverage against enormous risk." Both Daugherty and Hunter disagree with that sentiment, arguing that it's wasteful for consumers to protect themselves against dying in a particular way. "If you are killed, to your family it's a big loss however you are killed," Daugherty says. "You don't need to protect against any particular way of getting killed. You are much better off having a good insurance."
  • Accidental death – Unless someone is in a particularly dangerous profession such as a stunt man, this type of insurance isn't needed. Moreover, most people don't die from accidents, making it unlikely that a person's heirs will ever see the money. Experts recommend a comprehensive life insurance policy instead. "You wouldn't buy toothpaste a squeeze out of the tube at a time," Hunter says.
  • Travel insurance – Most people don't need coverage to protect against a trip cancellation unless they are seriously ill and are worried that a recurrence of their disease may hamper their trip plans, Hunter says. This coverage might be worth it for people who are planning a particularly expensive trip that would be difficult to reschedule otherwise.
  • Whole life insurance – Most people are better off buying term insurance rather than whole life, which includes an investment component that people can borrow against. "We're solidly on the side of term insurance for most people," says Daugherty, adding that people need to make sure that a spouse who doesn't work outside the home is also covered because his or her death would "create a financial need on the part of the family."
  • Insurance against inconveniences – Rain on your vacation or the loss of a pair of contact lenses may be annoying, but they are hardly the end of the world. Nonetheless, there are policies available for these situations, Hunter says.
  • Identity theft – Consumers are increasingly worried that someone will steal their confidential information online. Consumer Reports, though, recommends that people regularly check their credit reports, which are available for free, instead. "We haven't been impressed with what we have seen so far," Daugherty says.
  • Insuring your clunker – It makes no sense to have comprehensive and collision insurance on an old car that's not a classic. The insurance company will only give you the official Blue Book value of the vehicle if it's totaled in an accident, says Carolyn Gorman of the Insurance Institute of America.
  • Extended warranties – These are often a waste of money. Most electronics goods of decent quality will not fail while they are under warranty. "We think they are generally not worth the money," says Daugherty of Consumer Reports.
  • Payment protection insurance – These policies will pay your credit cards or mortgage payments if you become ill or lose your job. Instead, people should make sure that they have enough money saved for a rainy day.
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