6 Kinds of Insurance That Aren't Worth It -- And What to Do Instead

By Damian Davila on 8 April 2015 0 comments

Forewarned is forearmed, an old adage goes.

Being prepared for the unforeseen is always wise, but some insurance companies may actually be cashing in on our fears of unpredictable events. Don't waste money on insurance you don't need — or by doubling up on coverage you already have. (See also: 14 Things Insurance Agents Don't Want You to Know).

Here are six kinds of insurance that aren't worth their cost (and a few coverage alternatives, just in case).

1. Rental Car Insurance

You shouldn't pay twice for the same thing. Depending on your car insurance policy and your credit card, you may already be covered for rental car insurance.

First, most primary auto insurance policies extend to rental vehicles up to your policy limits. For example, your liability insurance would pay for damages caused to other cars or properties. Review your insurance policy to get a clear picture of your coverages and policy limits. In case of questions, talk with your insurance agent or contact your primary auto insurance's customer service line.

Second, many credit cards offer secondary coverage for theft or damage to the rental vehicle. Secondary coverage means that after filing a claim with your primary insurance, the secondary insurance picks up fees, such as deductibles, loss-of-use charges, and towing costs. (See also: 13 Awesome Credit Card Perks You Didn't Know About)

What to Do Instead

To skip rental car insurance, stick to cars that meet the coverage limits and requirements of your primary car insurance and credit card. For example, some cards won't cover rental cars over $50,000 in value or with rental periods of over 30 days.

2. Extended Warranty

When you drop a couple grand on that brand new laptop, you don't even hesitate to accept that extended warranty insurance. But if you'd read the fine print on your credit card terms, you would have found out that you were already covered. Most credit cards offer extended warranties for an extra year.

Consumer Reports indicates that when breakdowns occur during extended warranty periods, the average repair cost for appliances is about the same as the average price for that warranty. This means that you're better off sticking with the free extended warranty from your credit card.

What to Do Instead

Just remember that to qualify for the extended warranty from your credit card company, you need to put the entire purchase amount on the card.

3. Collision Coverage for Old Cars

Talking about car insurance, here is another one that may be unnecessary.

Let's imagine that you own a car with a Kelley Blue Book value of $2,500 and that your collision coverage is $500 per year.That's 20% of your vehicle's value for one year of coverage! If you were to wreck your car and receive a total loss settlement, the most that you would receive is $2,000 (assuming a $500 deductible). Is this worth it?

This is a bad deal no matter how you see it. It gets even worse as the collision deductible gets higher, or the vehicle's cash value gets lower. Depending on your financial situation, dropping collision coverage for your old car may be a good idea. On the other hand, never drop your auto liability insurance.

What to Do Instead

Take what you would use on collision coverage and put it in a savings fund for your next car purchase.

4. Specified Disease Insurance

If you have a family history of a particular genetic disorder or are at risk for a terminal disease, you may lose sleep over the potential financial blow that might be coming someday. Most specified disease insurance writers claim that this kind of policy is worth it because it will cover expenses not reimbursed by your primary health insurer, such as out-of-pocket medical costs, child and household help charges, and experimental treatment expenses.

The reality is that you may be already covered. The Affordable Healthcare Act ensures that most insurance plans cover the health care that cancer patients and survivors might need. Current legislation requires that all plans sold in health care marketplaces must cover essential health benefits, including screenings, treatments, and follow-up care of cancer and other types of diseases. If you're concerned about a specific disease, find out your available options for coverage through your state's health care marketplace.

What to Do Instead

Get peace of mind through a comprehensive plan that covers your illness and skip the specified disease insurance.

5. Life Insurance for Children

This is a very sensitive topic. As a father of two handsome and smart boys, I will do everything in my power to provide them health, stability, and wellbeing. Buying life insurance for children doesn't make sense because they are not the main breadwinners in the family. In most scenarios, your children are your dependents, not the other way around. (See also: How and Why to Buy Life Insurance)

Life insurance for children would only make sense if you're dependent on your young children for income. Even under these circumstances, some parents may feel uncomfortable signing up their children for life insurance.

What to Do Instead

If you're concerned that you wouldn't be able to cover the potential funeral expenses of your children, then create an emergency fund savings or investment account to cover those expenses. That way, you're covered in case of need and you have a head start for a potential college savings fund for your children. Consult your financial advisor to determine which is the right choice.

6. Private Mortgage Insurance

Private mortgage insurance, better known as PMI, is meant to cover any money owed to your lender in case you default on your mortgage. This insurance is not meant to cover you at all. PMI is required by law for homebuyers with down payments less than 20% of the sale price of the property. (See also: Why You Don't Need Mortgage Life Insurance)

There are three reasons why PMI isn't worth it:

  • The average PMI payment ranges from 0.5% to 1% of the total loan value. The small percentage can be deceiving. In 2014, the average U.S. mortgage debt was $155,192. Assuming a 1% PMI, the average PMI payment in 2014 was about $1,551. That money would be better used as a contribution to your retirement account or payment to credit card debt.
  • PMI payments may not be tax deductible. Families with over $109,000 adjusted gross income ($54,500 if married filing separately) per year can't deduct PMI payments on their tax declarations.
     
  • PMI may be cancelled. Under the Homeowner's Protection Act, you can request your lender terminate your PMI when your loan value reaches 78% of the original market value of the secured property. Keep in mind that there are several requirements, such as no junior liens and no dramatic market value swings. Plan ahead, work on improving your credit history, and make mortgage payments on time within the last two years, so that your lender doesn't come up with any "buts" to your request.

What to Do Instead

Save up for a 20% down payment on your property and skip private mortgage insurance altogether.

For those with a high credit score, another option for avoiding PMI may be available: an 80-10-10 piggyback loan. Under this type of loan, a bank offers you a mortgage for 80% of the home value, and a second mortgage or home equity line of credit (HELOC) for 10% of the home value. This way you're able to come up with a 20% down payment but only with 10% out of pocket. Consult your local bank to determine your eligibility for a piggyback loan, find out terms (e.g. some banks may offer 80-5-15 or 80-15-5 piggyback loans), and figure out if a piggyback loan is right for you.

What are some insurances that you wished you had never signed up for?

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