If you succumb to the temptations that land in the mailbox, it might be possible to insure yourself right into the poorhouse.
In addition to buying homeowner’s or renter’s insurance, auto insurance and health insurance, many consumers routinely purchase life insurance (term or some version of whole life), long-term care insurance, disability insurance, business insurance, and excess liability coverage, also known as umbrella insurance.
These days, it seems as though there is an insurance policy for every sort of situation consumer might face. If you own a boat, you can (and probably should) purchase boat or personal watercraft insurance. If you take an expensive, extended trip, you can purchase travel insurance. There is specialized insurance for your children who are away at college, pet owners, motorcycle owners, and even for those planning their wedding.
You’ll need certain types of insurance in order to create your financial safety net. But in recent years, different types of insurance have been introduced that seem to better serve the insurer than those who pay the bills.
Mortgage Insurance — take a pass
By the time you return from closing on the purchase of your new home, you might already find the first offers for mortgage insurance in your mailbox.
Mortgage insurance promises to pay the balance of your loan should something happen to you. Like life insurance, if you die, the policy pays off.
But with mortgage insurance, the policy will only pay off your mortgage. But conventional loans are structured as part principal and part interest. So, every payment pays down the principal balance of the loan.
With mortgage insurance, you’re paying a high premium for a declining liability. And if you prepay your mortgage, you’ll be paying a whole lot of money simply to have the remaining mortgage balance paid off.
A better choice is to purchase a simple term life insurance policy. The annual fee for the policy will be less expensive (particularly if you lock in a level load policy with a fixed annual cost) than with mortgage insurance and you can use the proceeds to either pay off or pay down the mortgage or use to pay off other expenses. Finally, you’ll be able to afford a lot bigger term life policy for the same amount you’d spend for a nominal mortgage insurance policy. Some mortgage insurance policies may offer additional benefits, but generally the premium for mortgage insurance policies is quite higher than term life insurance policies.
Credit Life and Disability Insurance — take a pass
This category of insurance will pay your monthly installment bills, like your credit card bill, auto loan and even your school loan if you die or become disabled. Other forms of the policy pay off if you get fired from your job (or lose it because of a catastrophic event, like a natural disaster).
You’ll get offers for credit life and disability insurance through the mail, along with your credit card bill each month, or through other third-party offerings. Some credit card companies offer the insurance for free for a period of time before they start charging you. If you don’t cancel by a certain date, your next bill will reflect the additional cost.
Instead of buying this type of insurance, which is expensive given the relative value it offers, consider buying, if it is available to you, straightforward disability insurance instead.
Disability insurance replaces up to 70 percent of your income should you be unable to work. And you can buy a policy from a host of reliable insurers with good track records of paying claims. Some insurance carriers may require you wait a certain period of time before making payment on the policy. It may be six or maybe twelve months. So you would want to make sure you have enough saved to help you through the initial waiting period in case you were to become disabled.
Extended Warranties — depends on the item
When some financial experts say that stores like Best Buy make more money from selling warranties than they do selling the products they’re tied to, it’s time to rethink whether you need to buy an extended warranty.
In general, if you’re buying new car, and you’re offered an extended warranty for $1,000, it might be a good idea. If you’re selling your home, buying a homeowner’s warranty that guarantees the buyer that any appliance working in your house on the day of sale will be fixed or replaced for the first year after closing may also be a good idea. (If nothing else, you should buy it for the marketing edge it can deliver in a softer market.)
If you’re putting a new roof on your house, read the warranty that comes along with the roof. Look for a roofer who will give you a warranty for the installation, along with a manufacturer’s warranty for the materials. You may not pay separately for an extended warranty, but you can often choose a higher grade of material that will offer a longer warranty.
If you’re buying a $450 television for your living room, spending another $200 on a warranty is probably a waste of money. But if you’re buying a plasma television for $5,000, and the repair history is weak and the cost is $200, it might be worth it. Most consumers don’;t realize that their new products typically come with a warrantee from the manufacturer.
Above all, make sure you read the warranty from start to finish, so you understand what you’re getting for your money. One surprise — many warranties require you to pay the first $50 to $100 of a repair.
Most top insurance companies offer their products on the web. Check out insurance aggregators like Insure.com to compare prices between hundreds of insurance companies.
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