Updated Jan. 18, 2018: There’s a reason why it’s our mission to help Americans get the financial protection they need and feel good about it: Most people don’t understand their insurance needs well enough to use it properly - as protection for their health, well-being and loved ones, now and in the future.
Health insurance, life insurance, auto and homeowners and renters insurance are some of the basic, fundamental policies that most folks need of at some point in life.
But there are quite a few types of insurance out there you don’t need, too. So, as important as it is to understand an insurance policy that’s a good fit for you, it’s equally as important to identify a policy that’s completely unnecessary (or, in some cases, so resolutely bizarre) that paying your premiums — no matter how affordable — amounts to an utter waste of money.
Here are some insurance policies we recommend avoiding unless you have an exceptional circumstance that makes it a good fit for you:
1. Private mortgage insurance (PMI)
Average monthly cost: 0.5 to 1% of your loan
A down payment on a house is a huge up-front cost many people can’t afford. That’s where private mortgage insurance comes in. It’s actually charged to borrowers making a down payment of less than 20% of a home’s appraised value. These borrowers are perceived as higher risk, so taking out a policy to protect the lender from default is part of why PMI exists. PMI is required of borrowers, but under certain state laws, it can be canceled if your home’s equity has appreciated and you owe less than the 80% of its value in your mortgage loan.
Are you thinking what we’re thinking? That’s right — PMI is a one-sided insurance the policyholder (in this case, the home loan borrower) pays for solely to benefit a third-party (in this case, the mortgage lender). You’re paying for coverage that not only increases your monthly mortgage payment, but serves no benefit to you (except to remind you that not to default on your loan).
Try this alternative: Your best bet is to save up for a bigger down payment; it’s often worth the wait. Or, you could make a lower down payment, say 10% to 15%, and use the remainder to borrow money on the property’s sale price. It’s money you’ll need to pay back, but better than an insurance policy that goes on and on as a monthly expense with no direct benefit for you or your family.
2. Credit card insurance
Average cost: $0.75 to $1.50 per $100 credit card balance
If an insurance policy seems too good to be true … well, it probably is. Case in point: credit card insurance. Not unlike some of those shady credit repair companies (read: scams) out there, any policy that promises you full coverage if you go into debt most likely comes with a catch.
That’s exactly what many credit card insurance policies promise: to pay off your credit card balance when you can’t. And the rates don’t seem all that bad: from 75 cents to about $1.50 for each $100 of an outstanding credit card balance, you can fend off debt next to nothing. Great, right? Yeah, not so much.
The truth is credit card insurers are generally only willing to take over your monthly minimum payment, which for most card issuers, is normally in the $20 to $30 range.
Try this alternative: For those prices, credit card insurance might just send you further into debt. You’d be better off paying your own monthly minimum instead of forking over cash to a relatively thankless insurance carrier.
3. Life insurance for children
Average monthly cost: $2.50 to $6.25
There’s some perceived merit behind buying a life insurance policy for a child. First off, it can act as an early savings vehicle the borrower (in this case, your son(s) or daughter(s)) can tap into later in life. A life insurance policy keeps them covered in the event they develop a health condition, for example, that might make it troublesome to qualify for future coverage. And as difficult as it is to consider, a life insurance payout can also help families cover funeral expenses in the untimely death of a child.
Still, we don’t recommend getting life insurance for your children. With their entire lives ahead of them, most children will grow up and have few troubles saving up money or finding insurance of their own. And the chances of becoming sick and dying are exponentially lower than that of the senior population, who should be considering life insurance the most. It also goes without saying that a child has no offspring, heirs or assets, so there’s nobody to leave anything to by buying a policy.
And if life insurance for your son or daughter seems like a good idea to save for their college tuition, taking out a policy may never yield enough dividends to truly make it a good investment.
Try this alternative: Your best bet? A tried-and-true 529 college savings plan. Just keep in mind that you’ll need to watch out for fees and other withdrawal regulations that could reduce your tax-free earnings.
4. Wedding insurance
Average cost: approx. $100 to $550 per wedding
‘Til death do you part — or, until the wedding is called off for one of countless reasons. Considering the average cost of swapping vows these days ($35,329, on average, according to The Knot), you’d think a wedding insurance policy would be the first thing you’d splurge for before any gowns, tuxedos, rings, venues or caterers even enter the picture.
Policies run from just under $100 up to about $550, and protect against financial losses associated with having to unexpectedly cancel your ceremony. Say, a vendor goes bankrupt, a major storm closes off roads or shuts down the airport (or blows away the church), a mishap ruins your wedding dress or the bride or groom falls ill.
But there’s really no need for one big umbrella policy covering your wedding costs when you might already have the coverage you need. Most of your vendors — everyone from your caterer to your florist to your reception venue — will already carry some sort of liability coverage. If you and/or your spouse-to-be own a home, your homeowners insurance (a policy you do need) may also offer some liability coverage (like if some over-inebriated guests suffer an injury).
Some wedding insurance riders also differ in their definitions of natural disasters or other catastrophe, making it difficult to cash out. Plus, many policies don’t insure against the worst wedding killer: getting stood up at the altar. So, ask your vendors about their insurance policies upfront and skip out on this one.
Try this alternative: The high cost of wedding insurance on its own might be enough to make you live beyond your means — not counting the expense of the wedding itself. Before planning a wedding, budgeting carefully can help you better afford the ceremony you and your significant other want, plus it’ll help you see what you can afford to cover out of pocket in case anything goes awry.
5. Extended warranties
Average cost: varies for appliances; for automobiles, $1,214
The word "insurance" isn’t in "extended warranty," but an extended warranty is indeed a type of insurance policy. We’ve all been pressured with the sales pitch after buying a major appliance or automobile, and it’s tempting to plunk down some extra coin, first, for peace of mind, and second, considering that your new $5,000 flatscreen TV or jumbo smart refrigerator might go on the fritz without warning. Then there are the further sales pitches at the car dealer to extend your new car’s warranty past its standard coverage.
But how necessary are they really? The fact of the matter is that most modern electronics and devices have a poor likelihood of breaking down or failing during the very brief warranty period — say 12 months.
Try this alternative: Considering that an $800 stereo or laptop comes with a $100 warranty, you’d be better off taking a chance on your new product and negotiating for a return or store credit if something goes awry that quickly. Plus, some credit cards offer extended warranties on items you buy with the card, so there's a good chance you can get extra coverage just by smartly using what's in your wallet.
In terms of buying a car, be careful that the extended warranty doesn’t inflate your monthly payments beyond making the auto loan unaffordable.
6. Mortgage life insurance
Average cost: varies by age, gender, health history and state of residence
Is it mortgage insurance, or is it life insurance? Both, actually. A mortgage life insurance policy pays off your mortgage if you die. That sounds like a pretty good idea: paying off your mortgage and avoiding leaving your family stuck with debt. Considering that a home is one of the most expensive (if not the most expensive) purchases made in your lifetime, you might think such a policy would be a must, alongside standard life insurance coverage.
Try this alternative: It’s not even really an alternative plan; a good life insurance policy should be enough to keep you, your heirs and your mortgage payments covered in one. You may even have one in place already. When you think about it, in the untimely passing of a homeowner, survivors will need to think about other bills past the mortgage payments. While keeping a roof over their heads is a priority, a mortgage life insurance plan won’t compensate families the way a term life insurance plan would. And it’s more expensive, too. Since most mortgage life insurers don’t require a medical exam prior to signing up, rates may end up being higher even if you’re healthy. Providing health information for a term life insurance policy means your coverage can be more accurately priced according to your health history.
If the concept of mortgage life insurance seems great in theory, using a traditional term life insurance policy will still bring you out on top financially. However, when shopping for a policy, always calculate how much insurance you really need — including your mortgage payments over the next few years or decades — to avoid spending too much.
7. Unemployment insurance
Average cost: varies, according to where you live, your profession and your coverage amount
A pretty straightforward type of coverage, unemployment insurance does just that: minimally covers your bills and expenses in the event you’re out of work. This can be handy in the event of a surprise layoff, or if you’re living paycheck to paycheck and don’t have enough of a savings to pull from.
Try this alternative: If your financial situation keeps you one step away from poverty and homelessness, maybe an unemployment insurance policy isn’t what you need. In this case, consider better budgeting practices or lifestyle changes to free up some money for an emergency fund. Downsizing your living arrangements or seeking more gainful employment may be a better choice than simply buying a policy just in case you’re out of work (which may never happen to begin with). Don’t forget that you can apply for and receive government unemployment benefits to hold you over until finding your next job opportunity. Unemployment insurance may amount to nothing more than a handout you’re paying for yourself.
Bonus tip: Think carefully about whole life insurance
On paper, whole life insurance sounds like a good idea. Buy a policy, get lifetime coverage for you and your family and your policy doubles as an interest-bearing savings account. (Whole life insurance is permanent life insurance that comes with what's known as a cash value component.)
However, as attractive as it sounds, whole life insurance isn’t usually someone's best bet when it comes to financial protection. That's because its premium are much higher than term life insurance. And, as a forced savings vehicle, there are usually more lucrative bets. Having said that, whole life insurance might be called for if you're affluent and trying to leave a tax-free inheritance to your heirs or have a special needs child that will need care after your death. You can go here to learn more about when whole life insurance is appropriate.
Try this alternative: For 80% to 90% of people, we recommend a term life insurance policy. For one, annual premiums are much cheaper. Plus, most people don't need robust coverage once their family is no longer dependent on their income.
What about the absence of a cash component? You’d be better served by searching for another high-yield investment vehicle with more robust savings potential (even a Roth IRA will do for now). People with unique circumstances — like complicated estate planning needs — might find benefits in whole life insurance. For the rest of us, term coverage is the smarter choice.
Image: Alan Cleaver