Insurance to Just Say No To
Are you spending too much on insurance? In this column, "Early Show" Financial Adviser Ray Martin shares some advice on selecting coverage and points to some types of insurance you may not need -- even if disaster strikes.
No one enjoys paying for insurance, but there's no question that good coverage can protect and save your assets.
However, that doesn't mean you need to buy insurance for everything. In fact, you can insure almost anything these days, but does that mean you should?
When buying insurance of any kind, I advise people to keep these four rules in mind:
1. Cover Only Big Risks: Buy insurance only to protect you against risks that would be financially devastating.
2. Don't Over-Insure: buy the right type and right amount of coverage, never buy too much, and don't buy insurance for limited risks, such as a specific disease or to cover a single loan.
3. Cancel Coverage You Don't Need: Buy insurance when you need it - and cancel it when it's no longer needed.
4. Keep Emotions Out: Never make a decision to buy insurance solely for emotional reasons.
With these four rules in mind, here is a list of insurance policies that most of us can just say "NO" to:
Mortgage Life Insurance: When people buy a new home or refinance an existing mortgage, promotions for this type of insurance are sure to flood their mail box. Basically, the mortgage company or an affiliate offers you an insurance policy designed to pay off your mortgage in case of your death. Of course having enough insurance to pay off your mortgage is ONE reason to have life insurance, but you're better off buying enough term life insurance to cover ALL of your needs, in one policy at the lowest cost possible, instead of buying separate policies that are sold as add-ons.
But there is one exception. Some of these mortgage life insurance products are "guaranteed issue," which means that the health standards to get approved are lower than typical insurance policies. So if you are in poor health and might not be able to get any life insurance otherwise, then this coverage may be worth considering.
Travel Insurance: The number of people buying this insurance has jumped since before disasters like 9/11 and Hurricane Katrina, when about 10 percent of travelers bought travel insurance; now the percentage is closer to 30 percent. Travel insurance typically encompasses three main categories of coverage, which include: Trip cancellation/interruption, loss of personal effects, and emergency medical insurance.
The typical cost of trip cancellation insurance is five to seven percent of the price of the travel -- so a $10,000 vacation would cost $500 to $700 to insure. Experts agree that when dealing with reputable travel agencies, consumers are likely to receive refunds on cancelled trips. Group tours and cruise lines will often offer their own cancellation waivers for a very low cost ($40 to $60). Just be aware that this doesn't cover the money you lose if the company itself goes out of business. Also, check the fine print on your credit cards -- they often offer some travel cancellation coverage.
And personal effects coverage may be redundant -- your homeowner's or renters insurance may already provide coverage for the loss of personal effects when traveling. Of course, you'll have to pay the deductible first. Airlines are required to reimburse you for up to $3,300 for lost bags ($1,500 on international flights.). Also, check your credit card -- some credit cards provide additional lost baggage coverage, protection for car rental losses and even additional death benefits.
It is advised to consider additional travel medical insurance to cover medical mishaps, particularly when engaging in certain activities such as skiing, rock climbing and scuba diving abroad. This is because if you need emergency medical attention and evacuation, these costs may not be covered by your existing insurance. First, check with your existing health insurance plan and ask what is covered. You should do this before any trip abroad. If your plan does not cover certain items, then this coverage may be a good idea, particularly if you intend to engage in high-risk activities. Travel medical insurance which covers doctor bills overseas or a medical evacuation, can cost from $25 for a few days of coverage to annual policies for over $2,000.
The bottom line: Although losing money's never fun, the chances of suffering a devastating financial loss because your vacation was cancelled is not likely -- for this reason trip cancellation insurance may not be necessary. Instead, deal with a reputable travel agency and consider a cancellation waiver. Flight insurance in particular should be unnecessary of you have the right amount if life insurance to begin with.
Life Insurance on Children: Life insurance should only cover people on whom others are financially dependent, not the dependents themselves. Since you don't rely on your kids for income, you really wouldn't need financial help upon their death. Grandparents and others sometimes like to give life insurance policy on a grandchild as a gift, but they are simply not worthwhile. Instead, they should make a contribution to a 529 education account or to an IRA.
From a mortality perspective, there is a lower probability that a child will die prematurely. The bottom line is that the decision to buy this insurance involves emotion, not logic. This type of insurance is highly profitable for the insurance companies and those who buy it are not likely to ever collect from it.
Wedding Insurance: This insurance covers a variety of nuptial mishaps -- no-show photographers, photos that don't turn out, stolen wedding gifts, reception facilities destroyed by weather or going out of business. There is even a policy that reimburses losses when the bride or groom gets cold feet! If you buy it for this reason, you should rethink the wedding altogether.
Basically, IF something happens this insurance pays for lost deposits or to reschedule or even restage the wedding. The insurance was first offered in 1993, and although it's been popular in the U.K., the coverage has been slow to catch on in America -- less than two percent of the betrothed in the U.S. buy it.
The coverage costs about one or two percent of the cost of a wedding -- and with the average cost of a wedding around $25,000, expect to pay $250 to $500, or more for this coverage. The chances of a disrupted wedding causing an unrecoverable financial loss is small, so it's not advised to buy these wedding insurance policies. You can manage your risk more cost effectively by contracting only with reputable vendors.
But you might think instead about buying additional liability insurance, especially if you are planning on having the wedding and reception at your home. Often this is required by reception facilities too. I typically recommend this to protect the hosts from any injury or damage claims caused by their guests.
Pet Health Insurance: I have a fond place in my heart for animals, but my wallet isn't attached to it. The trend of "humanizing pets" has gone beyond the realm of reasonable as more pet owners are purchasing this coverage. Pet owners are increasingly willing to spend larger amounts of money on the care and comfort of their pets. And reports indicate that about five percent of employers -- including companies such as eBay, Office Depot and Hilton Hotels -- are offering group pet insurance programs to their employees. The benefits include coverage for a pets X-rays, surgeries, lab tests and routine treatments. With the recent large-scale contamination of pet food causing illness and death to thousands of pets across the nation, more pet owners are considering this coverage. Pet owners can expect to shell out anywhere from $10 to $30 a month for a basic plan that reimburses up to 80 percent of covered costs.
Some of the industry's oldest pet insurance companies report that common illnesses can cost $300 to $400 in vet bills and treatments for severe conditions can cost as much as $4,000, or more. It's estimated that Americans spend over $11 billion at the vet each year.
But buying this coverage goes against two rules: you shouldn't buy insurance for emotional reasons and only insure for big financial risks. A more cost-effective approach would be to budget for these additional expenses while your pet is younger and later when your pet falls ill, you can decide to either spend your savings or let nature take its course.