Save Money on Insurance – Skip These Insurance Policies You Don’t Need!

Fear sells, and nothing is more fearful than the future. Insurance agents have known this for ages, and the most unscrupulous of them will play up the fear factor to the hilt. That’s not to say that all insurance is unnecessary or that all agents are fear mongers. Insurance has a definite purpose – to protect you from the financial risk of some future event that, while unlikely to happen would be financially devastating if it were to happen.

Many insurance policies sold today are simply unnecessary in most cases. Knowing which policies are needed and which aren’t will go along way toward arming yourself with the knowledge needed to protect yourself from less honest agents.

1. Private Mortgage Insurance (PMI).

First up on the hit parade is the onerous PMI. Many homeowners only become aware of this after they buy a home an see their monthly mortgage payment has this extra fee included. PMI has nothing to do with protecting you or your home. It’s insurance for the bank to insure against the possibility that you default on your mortgage.

You didn’t expect the bank to pay for its insurance, did you?

Private Mortgage Insurance is required for loans with less than 20% equity – either a refinance for more than 80% of the value of the home, or a mortgage with less than a 20% down payment.

PMI can only be avoided in the initial opening process of the loan, after you’ve got the loan you have to wait until you have at least 20% equity in the home. This can be due to appreciation in the home’s value, which is unlikely in the current housing market, or by paying down the loan. Homeowners can accelerate this process by making extra payments – just make sure they are principal only payments.

(check out Why A Mortgage Loan Without PMI Is A Bad Idea.)

2. Extended Warranties.

An extended warranty is basically insuring against a breakdown of the product outside what’s covered by the basic warranty. That may mean a breakdown after the basic warranty has expired, or a breakdown of something not covered by the basic warranty.

Unless you’re purchasing a high-ticket item, the warranty is likely to cost almost as much as a total replacement. I paid $115 for my first lawnmower. At the time of check out, the sale clerk tried to upsell me on a 3 year extended warranty. I would “only” cost me 30 bucks a year. That would have been $90 in total – for a $115 lawnmower!

The dirty little secret on most warranties is that they only cover the things that rarely go wrong to begin with. So in most cases, you’re better off playing the odds that it won’t break. This is especially true if you save up the entire purchase price of the item before buying, and don’t buy on credit. Also, waiting for prices to come down helps too. I might be tempted to get the extra warranty on a $5,000 new flat screen television, but a $700 one? Not so much.

But then, the thought of spending so much on a “want” makes my frugal self revolt.

3. Automobile Collision Insurance.

Collision insurance is meant to cover the cost of repairs if your vehicle is involved in an accident. This isn’t necessarily useless. It depends on your financial situation and your car. I drive old cars that I can either pay for entirely or pay for mostly, leaving me with a lower loan amount.

Banks typically require you to carry collision insurance, so if you have a loan you will likely get stuck with this bill. But after the loan is paid off, the car is likely worth less that the insurance premiums you’re paying (are darn close)! In which case, you’d be better off putting that money into a savings account for car repairs (should they arise) or a new(er) car.

4. Rental Car Insurance.

People buy this?

Apparently they do, but they probably shouldn’t. Most people rarely need a rental car while their car is in for repairs, and if they do the cost is far cheaper than what they would pay in premiums. Personally, the few times my car has been in the shop long enough to need alternative transportation, the shop has provided either a loaner car or paid for the rental car.

5. Flight Insurance.

I’m not sure what this is meant to cover. I gather it’s meant pay your survivors should you die in a plane crash, but your life insurance would do that anyway.

6. Water Line Coverage.

Ah, now we’re getting to the really fringe insurance types.

This policy would cover the repair costs of the water line that runs from the street to your house. The likelihood that this would ever become a problem is slim – especially in new neighborhoods and given the relatively short distance covered in most suburban neighborhoods.

7. Life Insurance for Children

Life insurance is meant to cover the income of the insured in the event that they die prematurely. Children don’t have dependents to worry about. Some agents try to sell this kind of insurance as an investment for the child’s future. This gets to the Term Life Insurance vs. Whole (or Universal) Life Insurance debate. (see Life Insurance: What kind should I buy?) The same is true in this case – skip the whole life policy and invest the money that would go toward a premium in a Roth IRA for the child. (See Secret # 2. Make Your Grandchild a TAX-FREE Millionaire!) It will perform better with less fees and he’ll have access to the contribution amounts for his first home, while the rest will continue to snowball toward retirement.

8. Credit Card Loss Insurance.

This is meant to cover your expenses if someone steals your card or makes fraudulent purchases. It’s a complete waste because you’re only liable up to $50 by law, and most credit card companies wave that for good customers.

9. Mortgage Life Insurance.

Mortgage life insurance pays off your house in the event of your death. This is useless, since it’s the purpose of Life insurance to begin with , only life insurance will pay off the mortgage, and your children’s college expense and anything else you need.

10. Unemployment Insurance.

With government unemployment benefits lasting over a year, you’re far better off building an emergency savings account and using that to supplement the unemployment checks. If you can make Unemployment Insurance premium payments, you can make contributions to an emergency fund.

Check out the inspiration for this article and 5 more unnecessary Insurance Policies.

Related Posts:

• Cheat Sheet: How to Buy Life Insurance (Infographic).
• When is it Ideal to Drop Collision Auto Insurance?
• When To Switch Car Insurance.
• Is Gap Insurance A Good Idea?
• What Not To Tell Your Insurer.

Tax Time: Kiplinger’s “Do It Yourself Pay Raise” (Video).

Want a little more more in your paycheck every month? Get a big, fat tax refund every year?

Here’s how to turn that refund into a raise:

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Why A Mortgage Loan Without PMI Is A Bad Idea.

I was looking over some old documents recently and I came across my 1st mortgage. Ah the memories. I couldn’t believe how high the interest rate was – 6.50% – and that was a good rate for the time!

One other thing stuck out to me – no PMI. Not because we had a 20% down payment; we couldn’t afford that at the time. I had thought at the time that my bank was just better than other banks. See, this was a local bank. A small, home town bank – not one of those big evil banks that would catch all the headlines and hate from the public when the bubble burst years later.

It turns out that my sweet hometown community bank wasn’t doing me any favors by offering me a home mortgage with no PMI. PMI is insurance for the bank to cover their loss in the event that the borrower defaults on the loan. Instead of charging me a PMI premium with my monthly mortgage payment, they rolled this premium into the loan itself.

Is PMI included in the APR a good thing?

On the face of it, things looked great. I had a lower monthly payment without the PMI included. But over the long term, it’s more costly to the borrower because that PMI premium adds thousands to the principal of the loan, which in turn adds thousands in interest over the life of the loan (usually 30 years).

Banks love doing this because it juices their return since you’re paying this premium far longer than you would if it were added to the monthly payment.

Here’s a quick example.

Assume a home value of $200,000, with 5% down. This gives us a mortgage of $190,000. Using the CNN Money PMI calculator with these numbers gives us a monthly PMI of $80.

Since the value of the home is $200,000, and PMI is required until there is more than 20% equity ($40k in this case) this means that the outstanding value on the loan needs to be less than $160,000 (200,000 – 40,000).

Next, using the Mortgage Calculator at Bankrate.com, assuming a loan of $190,000 and an interest rate of 5% (currently high, I know, but historically low) and selecting the “Show Amortization table” option shows that it would take roughly 9 years of mortgage payments before the value of the loan would drop below $160,000.

9 years of mortgage insurance payments is: $8,640 (108 payments of $80)

Rolling the premiums into the loan lowers the monthly payments by $80, but adds 8,640 to the overall loan.

$177,185.99 total interest for base loan of $190,000 and $185,243.29 total interest if PMI is added to the loan amount.

That’s a difference of $8057.30.

Add that to the original amount added to the principal:

$8,057.30 + $8,640 = $16,697.30.

So, the bank wants you to think that you’re saving $80 a month by rolling the PMI into the loan, but you’re really spending an extra $8,057.30.

Caveats.

This is a simple example, but I think a compelling one. It assumes that the borrower is keeping this loan for the full 30 years. If you took out this sort of loan and refinanced or moved in 7 years, you’d come out ahead. But then again, you can’t always refinance – as millions of homeowners who owe more than their homes are worth now realize.

Traditionally, a healthy housing market would have some appreciation involved, which would also shorten the time before that magic 20% value is reached, but that would make the PMI included in the APR even worse.

The bottom line is that you never really know how long you’ll have the loan for or what your home will be worth in 10 years time. It’s my opinion that planning conservatively is best. Be at peace with the idea of holding the mortgage for the full term, and don’t count on rising home values to bail you out. That way, you can weather the storms and anything else is gravy.

Related Posts:

• Save Money on Insurance – Skip These Insurance Policies You Don’t Need!
• What Is a Bad APR?
• Notice of Mortgage Protection Insurance, a Scam.
• Will Refinancing My Mortgage Save Me Money?
• 4 Tips For Applying For a Mortgage