Save Money on Insurance – Skip These Insurance Policies You Don’t Need!
Posted: February 21st, 2012 | Author: Joe | Filed under: Insurance, Tips | Tags: Auto Insurance, Insurance, Life Insurance, PMI, Private Mortgage Insurance, Tips | 3 Comments »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.
Really great post.. you have explained beautifully all the useless kind of insurance policies. I too agree with you that flight insurance, water line coverage, rental car insurance, credit card loss insurance all such insurance are just nothing but a worthless trouble. One should avoid all such type of insurance policies.
This isn’t the first time I’ve seen most of these “unnecessary” insurance policies – but you really piqued my interest with the link below #1 – can you really put less than 20% down and avoid PMI? Clicking on that link next to see what you have to say!
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