7 Types of 'Insurance' That Are a Waste of Money
By Hiram Reisner
Some types of insurance and financial protection aren't only smart, but legally required: Most states demand some sort of vehicle insurance. Now, with the Affordable Care Act, you can add health insurance to the required list. Other coverage just makes sense, such as renters insurance or flood coverage for people who live in low-lying areas.
But, there are many forms of protection -- sold in the name of insurance, monitoring and warranties -- that are at best questionable and prey on one of our most powerful natural instincts: fear.
Here are some that we believe require careful thought or should be avoided altogether:
1. Identity theft insurance. Identity theft insurance doesn't really prevent identity theft. The best way to protect yourself, according to tips from the National Association of Insurance Commissioners is to take measures to guard your Social Security number, shred financial documents and monitor your credit activity.
Identity theft insurance policies don't cover the money lost through an ID scam; most cover expenses incurred in restoring your identity and credit, and you can probably take most of these steps yourself, according to U.S. News & World Report.
The NAIC says insurance ranges from $25 to $60 a year; most policies have benefit limits ranging from $10,000 to $15,000; and many have deductibles requiring you to pay the first $100 to $500.
Closely related to ID theft insurance are credit monitoring services. But these, too, offer to perform functions already provided by your credit card company or watch transactions that you can monitor yourself.
You can get fraud alerts from your credit card company and free credit monitoring from some financial institutions and other organizations, according to the Privacy Rights Clearinghouse.
In addition, the Federal Trade Commission provides tips on how to protect yourself from becoming a victim, without the need for "insurance." So does the Identity Theft Resource Center.
2. Extended warranties. Whether you are buying a TV, a computer or a hedge trimmer, chances are when the salesman tallies up the bill you will be offered an extended warranty. In most cases, you don't need it.
According to Consumer Reports, 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! The salesperson gets a hefty cut of every warranty sold.
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.
3. Home warranties. Consumers frequently expect more than these plans deliver and end up frustrated, Money Talks News founder Stacy Johnson says. See: "Are Home Warranties Worth the Money?" for a breakdown of the pros and cons of home warranties -- the majority are cons.
If you decide to go with a warranty, you need to read the fine print to see what is really covered. Stacy 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."
Furthermore, in my experience, the warranty dictates which repair company comes to your house: You don't have any say in that. If you have a trusted plumber, electrician or appliance service, this is another reason that a home warranty may not be for you.
4. Rental car insurance. You will be offered the insurance, but you might already be covered.
Call your insurance company before you rent to see whether your coverage includes rental cars. Most do, but it depends on your policy. Make sure you tell the insurer what type of vehicle you are going to rent, from my experience it can make a difference.
If you pay with a credit card, you also are probably covered as most cards give you rental-car insurance of some sort, according to the Insurance Information Institute.
In decades of business travel, working with many car insurers and car rentals, I have never found that I need additional insurance from the rental car company.
5. Air travel insurance. Travel insurance can minimize financial risks of traveling: accidents, illness, missed flights, canceled tours, lost baggage, theft, terrorism, travel-company bankruptcies, emergency evacuation, and getting your body home if you die, says travel expert Rick Steves.
Travel insurance can total between 4 and 8 percent of the cost of your trip, but can go as high as 12 percent, depending on the plan you choose, according to Travel Insurance Review, which also gives you a plan comparison.
Steves says your insurance needs depend on the specifics of your trip: whether it is prepaid, whether your ticket is refundable, where you're traveling (Norway or Nigeria?) and the financial health of your tour company and airline. It depends on your state of health and the value of your luggage. Finally, it depends on whether you already have coverage through your medical insurance, homeowners or renters insurance, and/or credit card.
6. Pet insurance. This is a tough one because most people consider pets part of the family and because veterinary bills are high. But this is a highly personal decision.
"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."
7. Cellphone insurance. "If your phone is super expensive and you're super likely to lose it, it could be worth it," Stacy says of cellphone insurance. However, very few people fall into this category.
If your problem is dropping 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.
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