Failing to protect yourself and your family against serious financial loss is a mistake. Still, though it’s not as potentially ruinous, overinsuring is a gross error, too. The cost of buying both a belt and suspenders adds up.
According to analysts interviewed by Money magazine, Americans wasted about $18 billion of the $180 billion or so that they spent on insurance coverage last year. “I’d estimate that 10 percent of what consumers spend on insurance is unnecessary,” says Robert Hunter, president of the National Insurance Consumer Organization in Alexandria, Va.
What follows are some policies to avoid, according to more than a dozen insurance analysts interviewed for this article. These two rules should guide you: 1) Don’t cover yourself against small losses that you could handle by tapping your savings, and 2) shun policies that insure you for just one risk, such as contracting a specific disease or dying in a plane crash.
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Narrow coverage is foolish; rely instead on comprehensive health or life insurance, which protects you against a variety of scenarios.
– Credit insurance. You hear the pitch just about every time you get a loan at a bank, car dealership or finance company: Check this box for credit life and disability insurance, and you can rest easy knowing your loan payments would be made if you became disabled or died.
Don’t do it. Credit insurance is generally a bad buy because it’s “grossly overpriced,” says Stephen Brobeck, executive director of the Consumer Federation of America. You could easily waste an extra $300 on a $10,000, four-year car loan, for example.
Instead of buying credit insurance for a small debt, simply expand your savings enough to handle several months of payments. For a large debt, increase your basic life and disability coverage.
– Term life insurance for a child. If you’re a parent, you might find this familiar life insurance agent’s spiel persuasive: Buy a term policy for little Merlin now for about $200 a year; that way, you guarantee that he can stay insured if he contracts a disease some day. Forget that-and remember this: The overriding reason to insure a person’s life is to protect their dependents against an immediate loss of income, which won’t apply to your child unless you’re one of Macaulay Culkin’s parents.
– Cancer insurance. Sure, it seems as though every day the newspapers report that something else you eat, drink or breathe could give you cancer. That’s why cancer insurers say you should buy their policies, which cost about $250 a year and pay benefits if you turn out to be the one person out of three who gets cancer during your lifetime. Comprehensive major medical coverage can insure you against all types of maladies at roughly the same cost, typically $250 a year per person for an employer-sponsored plan.
– Hospital indemnity policies. You’ve undoubtedly received a mailing or seen a Sunday newspaper ad like this: “For just pennies a day, we’ll give you up to $75-cash-for every day you’re in the hospital.” Problem is, the average hospital stay runs $750 a day. Besides, a comprehensive health policy, covering major expenses in or out of the hospital, should make such a policy unnecessary.
– Mortgage protection insurance. Since no job is secure these days, you may be tempted to get a policy that will make your mortgage payments for 6 to 12 months if you are laid off. If you do, however, you’ll find yourself paying a lot for relatively puny coverage. Premiums tend to amount to 3 to 4 percent of your annual mortgage payment.
– Home warranties. These contracts, which protect you against major home defects, are offered by real estate agents or builders. Although policy sales of warranties on resale houses have nearly doubled in the last five years, according to the National Home Warranty Association, don’t be quick to sign up.
Warranties run a steep $300 to $500 a year, plus $50 to $100 whenever the company’s contractor makes a service call on an existing house. What’s more, the warranties are frequently filled with exclusions. Instead of getting a warranty, spend $170 to $300 for a home inspection.
– Collision insurance on old cars. Here’s a way to cut your auto insurance by 20 to 40 percent: Drop your collision coverage if your car is more than, say, five years old and the collision portion of your premium exceeds 10 percent of the car’s market value. Just figure on buying another car if the one you’ve got gets wrecked.
Check the National Automobile Dealers Association’s Official Used Car Guide or the Older Used Car Guide (for 1976-1985 models) at the library for an estimate of your road-weary model’s value.
– Extended-service contracts. Ironic, isn’t it? Right after your dealer tells you what a honey you bought, he hands you off to another guy pushing a service contract for when the car breaks down. Just say no.
“Extended-service contracts are complex and overpriced,” says Jack Gillis, author of the annual Car Book (HarperCollins, $11). Contracts typically cost $600 to $2,000 for two to five years of coverage. But the big-ticket items covered by these documents rarely give owners trouble during the first few years of ownership.
– Flight insurance. There you are at the airport, belting down your second drink to calm down before you get on a plane. You see the Mutual of Omaha vending machine that can spit out a $16.75 policy covering you for as much as $500,000 if you die or lose any limbs in a crash.
Pass it by. You don’t increase your insurance every time you get in a car. Yet you are 56 times more likely to be killed in an accident while in a car than in a plane. Save the $16.75 for a tacky souvenir at the airport gift shop.
– Rain insurance. Your property insurance agent might say he has just the ticket if you’re worried about rain spoiling your garden party. But the premium for a rain insurance policy ranges from 5 to 10 percent of your party’s tab. Save your money. You can always give your guests a rain date or shift the festivities indoors.
– Wedding insurance. No, Fireman’s Fund “wedding-surance” policy won’t reimburse the father of the bride if the groom gets cold feet. It offers, among other things, as much as $20,000 for non-refundable expenses incurred by canceling the wedding owing to such unlikely misfortunes as an injury to the bride or groom and as much as $500,000 in personal-liability protection if someone is hurt, say, dancing the bunny hop at the reception.
Don’t bite-at least not till you see whether you’re already insured, perhaps by the wedding or reception site’s liability policy or your homeowner’s policy.