8 Types of Insurance Most Americans Should Avoid
There are insurance policies to protect against almost every kind of risk, but not all of them are wise uses of your money. Start by avoiding these eight.
Insurance is one of the best methods for mitigating risk in most areas of your life. Throughout your lifetime, you will encounter many kinds of insurance that you may want, need, or are required to purchase (at the very least, most states require every motorist to have some form of automobile insurance).
Of course, no one wants to throw away their money to pay for policies that do not benefit them or fit their situation. Here are eight types of insurance that most Americans can do without.
1. Mortgage, Whole, and Child Life Insurance
For people with families, dependents, or other loved ones in their care, life insurance is a good way to ensure you can provide for them in the future. There are many kinds of life insurance policies available but you should think twice before buying these three types.
Mortgage Life Insurance
Mortgage life insurance provides coverage for outstanding mortgage payments in the event of the policyholder's sudden death. This means that the insurance company will pay the remaining mortgage payments on behalf of the deceased policyholder.
That sounds pretty good, but let's think it over.
The primary objective of any life insurance policy is to ensure a burden-free future for your family and dependents. A mortgage, however, is typically not the only financial problem they would face in case of your sudden death. They may have to deal with various financial crises, and, in those cases, mortgage life insurance won’t help them one bit.
Because it offers such limited risk mitigation, it's best to find an alternative. A good term life insurance can cover most of those unexpected circumstances. Your family will be able to use the money from a term life policy to help pay down the mortgage and also resolve numerous issues that mortgage life insurance won't be able to take care of (learn more Top Reasons to Forgo Mortgage Protection Life Insurance).
Whole Life Insurance
Whole life insurance has a savings component and high premiums. With this policy, your insurer invests a portion of your premium payment and eventually provides you with returns (see 5 Things You Need to Know About Life Annuities to learn more).
The problem with these policies is that most of the focus is on investment rather than insurance. This results in massive charges due to very high insurance agent commissions and very limited return in comparison to other savings or investment options. Besides, you don't need a middleman to save and invest on your behalf (for great resources that will help you invest and save smartly, see Top 25 Personal Finance Bloggers to Follow on Twitter).
Child Life Insurance
Life insurance policies provide financial coverage to policyholder's family members. A child, however, doesn’t earn money and nobody depends on them for financial support. Therefore, while it would be tragic and devastating, no one would become financially ruined in the event of their sudden death (see this Q&A on child life insurance to find out more).
Of course, insurance agents may try to convince you that it would be like savings for your child. But if you want to save money for them all you have to do is put it in a savings or investment account. That is far simpler and has a much better return.
2. Accidental Death Insurance
It doesn’t feel right to even think about accidental death, but this insurance policy encourages you to do so. Although it seems reasonable to buy coverage for accidental death, it’s difficult to predict and include all the possible fatal accidents in a policy.
The result is worse than ordinary term life insurance because the company can reject your family's claim if you die from the wrong accident or some other cause like disease or old age. Consider just buying term life insurance and keep your peace of mind.
3. Credit Card Loss Protection Insurance
Losing a credit card can leave a lot of your money vulnerable, especially if you have a very high limit. So, credit card loss protection insurance may seem like a good option, but it's likely not. You are liable for a maximum of $50 if you do not notify the authorities about your lost credit card in time. However, you don’t even need to pay that amount because most credit card issuers are by default willing to take on that risk on your behalf (learn about 9 Insurance Perks Your Credit Card Provider Might Offer). This insurance is not worth your time and money.
4. Extended Warranties
If you buy some valuable consumer appliances, opt for a high profile and reputable brand. In most cases, their product will work great and you won't ever have to worry about claiming the warranty. Even if it does malfunction at some point in the distant future, you can just spend money to repair it when it does rather paying up front for a warranty you may never use.
5. Identity Theft and Cyber Breach Insurance
In the case of identity theft, your loss may far exceed the insured amount, or the provisions may only offer inadequate compensation. The key problem is that determining the amount of loss is quite complex. Moreover, federal law provides safeguards for the victims of identity theft so you don’t really need this insurance (learn more in Identity Theft Insurance: Is It Worth the Price?) It is better, instead, to continuously monitor your finances and instantly notify the authorities of any suspicious activity.
The same more or less applies to cyber breach protection policies. You are better off paying much more attention to securing your valuable data. In case of a breach, you may find it quite difficult to be reimbursed by the insurance policy, depending on the circumstances (see An Introduction to Cyber Insurance for Businesses to find out more).
6. Cell Phone Insurance
Here is a burning issue: you have a valuable smartphone and you want it insured. Just hold on a second before making that decision. Do you really want to pay a large sum of money in premiums and deductibles to get a refurbished or used version of your phone (and even that’s not guaranteed)? You’ll also get nothing if the damage isn't the result of an accident. So why waste your money? Just put keep your phone someplace safe and if it does break or die after a few years of use, simply take the opportunity to buy yourself a better one.
7. Flight Insurance
You may be afraid of accidents happening on a flight, especially after high profile events like the Malaysian Airlines MH370 incident. But accidents of that sort are quite infrequent. Think about the sheer amount of people traveling by plane every day, and only a tiny fraction of them will ever be in a situation that is relevant to flight insurance coverage. Don’t waste money covering such minuscule risks. Once again, a good life insurance policy can protect you in these situations.
8. Old Car Collision
Your car is a rapidly depreciating asset, especially if it's an old one. So, it’s obvious that your insurance coverage would not add much to your net worth in the event of a collision. Just save the money and invest it in another car later on.
This article covered eight main types of insurance policies that are usually best to avoid, but depending on your particular circumstances, some may be worth it for you. Every situation differs, but the average person can do just fine without any of these policies and, on top of that, they will be able to put their money to better use.