Insurance You Can (and should) Live Without

October 17, 2008 By Debbie Dragon

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Companies sell insurance to help the average consumer relieve some of the fear of the unknown.  We don’t know what’s going to happen to us in the future, and that fear of the unknown is often what drives us to purchase insurance.  While there are many good reasons to buy insurance (for your car, for your life, for your health…) there are also many insurance policies you can, and should, live without.

• Private Mortgage Insurance (PMI):  PMI isn’t for you - it’s used to protect the lender against loss and is a policy required to “high risk” mortgage borrowers.  There are no benefits to you as the borrower of this insurance policy.  To avoid paying PMI,  you need a downpayment on your home of 20% or more.  A smaller downpayment puts you in the “high risk” pool of borrowers.  Alternatively, you can put down 10% of the purchase price and take out two home loans, one for 80% of the sale price of the property and one for 10% (with the loan for 10% being the other 10% that makes up your 20% downpayment!) just make sure that interest rates work out in your favor - if you are only approved for high interest rates it’s possible the PMI rate is actually lower than having two loans.
• Rental Car Insurance as Part of Your Regular Car Insurance Policy: There are a number of automobile insurance policies that allow you to add rental car insurance.  You amortize the price over your lifetime (or as long as you have that particular policy anyway), so it doesn’t seem like costly coverage but how often do you really rent a car?  Do you have a credit card that includes rental car insurance coverage if you pay for the rental on the card?  Chances are, you’re just wasting money paying for rental car insurance as part of your every day car insurance policy.
• Flight Insurance: Do you purchase flight insurance whenever you board an airplane?  Sure, your family will get $100,000 or whatever the amount your policy covers in the event the plane comes down and you don’t survive - but if you have a life insurance policy, chances are you’re covered already against a catastrophe like a plane crash.  Check into your life insurance policy to see whether or not purchasing flight insurance is necessary.
• Flood Insurance: There are only a few areas of the country that actually are at risk for flood damage.  If you’re not located next to a large source of water - chances are you’re not going to be flooded!  If your neighbors have never had flood damage - you probably won’t be the first house on the street to be flooded!  Instead of paying a monthly or annual flood premium, put that money into a savings account - you can pull it out in the very off-chance you experience a freak of nature event that floods your house.
• Unemployment Insurance: These policies are designed to help you pay the minimum payments on all of your bills if you become unemployed through no choice of your own.  While it sounds good at first glance, paying the minimums on credit cards doesn’t stop interest and finance charges from accruing so the money sent to these accounts will basically be wasted.  Instead of paying for an unemployment insurance policy, you’d probably be better off establishing an emergeny fund to help you cover your living expenses for several months should you lose your job.
• Credit Card Insurance: Yet another way the credit card companies make money from cardholders, credit card insurance plans are supposed to cover your minimum payments for qualified claims.  One of the problems is the type of qualified claims are very minimal - meaning most of the reasons you could be unable to make your payments won’t qualify for the insurance coverage.  Also, if you are self employed, you can never put in a credit card insurance claim - a small piece of information they often fail to mention when signing you up.

Before signing on the dotted line and handing over money every month for insurance premiums, find out exactly what they cover (and what they don’t cover).  You may already have coverage under larger insurance policies that protect you for many of the instances discussed here.

Posted in budgeting, credit cards, emergencies, financial plans, insurance, lifestyle, personal behavior, personal finance basics, travel

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