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Types of insurance you don't need

The Consumer Federation of America recommends this rule of thumb when purchasing insurance: Buy insurance that comprehensively covers you against catastrophic financial loss. If it doesn't meet this two-prong test, don't buy it. Also, be sure not to duplicate coverage - you might already be covered under another policy. Applying these rules, most people don't need the following types of insurance:

Life insurance on your children's lives.
Although this form of insurance may involve inexpensive monthly payments, and they may tempt you by promising to return all premiums when the child reaches 21, you're better off putting that money toward your own life insurance premiums, or investing for your retirement or even the child's college fund (example). Life insurance protects those who depend on your income. The death of a child is devastating, but typically it's not financially so. If your reason to purchase is because you are afraid that your child may be uninsurable later in life, the truth is that very few people are turned down by insurance companies or even charged a high-risk premium. Also, if they work, their employer typically provides group coverage regardless of their condition.

Flight insurance.
This type of insurance only protects you against the remote chance that you die in an airplane crash. A good life insurance policy protects you wherever you are, and hopefully you already have adequate life insurance. Also, many credit cards automatically give you free coverage when you charge your airfare to their card.

Extended warranties.
If your car breaks down or your DVD player goes on the fritz, it's usually more cost-effective to pay for it out of your own pocket rather than maintaining pricey extended warranty policies. Typically, the extra period of coverage is already based on historical information for that product that shows few anticipated problems. Also read the fine print because there may be conditions attached, such as required maintenance that, if not done, violates the warranty. If you need peace of mind, such as with your automobile, then certainly purchase this protection, but you don't routinely need it for all of your purchases.

Miscellaneous policies.
Polices that cover noncatastrophic events like contact-lens insurance, rain or trip insurance (that covers bad weather on your vacation, not cancellation), or health insurance on your pet are rarely worth the premiums. Most often, it is less expensive to pay for those things out-of-pocket.

Credit life insurance.
These policies are sold in connection with everything from car loans to credit cards and promise to pay off the loan in the event of your death for just a few dollars a month. Unfortunately, credit life is one of the most expensive kinds of insurance you can buy. It is much cheaper (typically about half) to purchase additional life insurance coverage instead. If you can't get life insurance, then and only then might you consider one of these policies.

Credit disability insurance.
These policies are sold in connection with everything from car loans to mortgages to credit cards and promise to pay off the loan or at least continue payments in the event of a disability. Read the fine print carefully to discover the waiting periods and/or exceptions. It is much cheaper to purchase disability insurance coverage instead, and then use the proceeds to pay whatever bills you want.

Rental-car insurance.
This coverage is normally provided by your credit card or automobile insurance policy. Purchase it only if you're sure you're not already covered.

Dental insurance.
If you have dental coverage offered through your employer-sponsored plan, and the premiums are inexpensive, by all means take advantage of it. If you are buying this insurance on your own, the premiums will probably be more than the allowed coverage (usually $1,000 a year per person).

Accidental death insurance.
Sometimes called AD&D, or accidental death and dismemberment, these policies are extremely cheap because they hardly ever pay out. Typically, these policies only cover death in the event of an accident while you are a fare-paying passenger in an airplane, taxi, train or bus. Some policies will cover death in an automobile, but you must have actually died while in the automobile (not later at the hospital), and the coverage may actually be less than the full amount of the policy.

For example, one mortgage company offers up to $500,000 of accidental death coverage for monthly premiums of $8.95 (single) or $15.25 (joint). However, the $500,000 is only for death aboard a plane, ship, train, bus, taxi or other licensed common carrier. Automobile death coverage is reduced to $100,000, and deaths by any other means (with a long list of exceptions) are reduced to $25,000.

For the price of these coverages, you should simply maintain the proper amount of life insurance protection for your family. If you can afford this accidental death insurance, consider using this money to increase your life insurance coverage.

Mortgage life insurance
This type of insurance pays off the mortgage if you die because of a "covered" accident. It's called lots of different names, such as mortgage protection insurance, but basically the products are all the same. It's basically very expensive life insurance except it usually only pays off the mortgage if you are killed in a plane/train/automobile accident. The monthly premiums typically remain fixed, or they may rise every five years or so, but the payoff value (what you owe on your mortgage) goes down every year.

Two things are important about these policies. First, read all of the exclusions, those types of death that are not covered! For example, if you die of an illness, die because of an intentional fight, or have been drinking and die, you will not be covered. Also, if you are in the military and serving in a conflict zone when you die, you will not be covered. Second, these premiums are much more expensive than term life insurance, and when you consider all of the types of death that are not covered, you will definitely be better off with regular term life insurance. Further, some of these products are billed as mortgage accidental death and disability policies, and they are no different than the AD&D insurance addressed above.

Mortgage insurance.
These policies offer to pay some expenses if you are forced out of your home due to a disaster (flood, tornado, etc.). These mortgage products are called lots of different names, such as mortgage rescue or mortgage catastrophe protection, but they all basically work the same way. They may pay your temporary living expenses, or they may pay your mortgage payments while your home is being restored. There are two basic issues with these products. First, your home must be damaged and unlivable, and second, it must be due to a covered loss. If your home is unlivable due to a disaster, your homeowner's insurance typically includes provisions to also cover your living expenses while it is being rebuilt. Second, if you are concerned about flood or earthquake protection, you could probably get much more appropriate and effective coverage for the same cost as this mortgage insurance. Check with your insurance company and make sure you have all the protection that you really need on your homeowner's policy. This includes ensuring that your current amount of coverage is sufficient to cover not only the rebuilding costs, but also temporary living expenses. If you are concerned about specialty coverage (such as flood insurance), try to arrange these as riders to your insurance policy. The protection will be much more effective and less costly.

Hospital indemnity.
These policies pay a set amount for every day you're in the hospital. At a cost of only a few hundred dollars a year, they seem inexpensive. But policies often only pay about $100 a day which isn't much when measured against average hospital bills of $1,000 or more. The best solution for this concern is to buy comprehensive health insurance instead. If you already have great health insurance, then you probably don't need this coverage, so spend the money on some worthwhile coverage like long-term disability.

Wedding insurance.
Along with liablity coverage, you get the promise of a refund of upfront costs should a wedding be cancelled for reasons beyond your control (but not because of bad weather or cold feet). This could include the bride or groom being injured in an accident, one being called up for military duty, and a natural disaster such as a hurricane or snowstorm that prevents the wedding or reception from being held. You can also get protection against damage to a wedding gown, photographic mishaps, and lost wedding gifts. The cost of this insurance is very expensive, although it may seem reasonable when you consider how much weddings cost. Still, the best answer is to avoid this type of specialty insurance. If you can comfortably afford the wedding, you should be able to handle any calamity that might occur. If you really can't afford the loss, perhaps you should think about scaling back the wedding, not buying insurance. If you just feel that you need this protection, to calm your fears or protect your investment in an elaborate, expensive wedding, buy the insurance, and let's hope it turns out to be a waste of your money (meaning the wedding is awesome and nothing seriously goes wrong).

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