Protection …or Overkill? Five Insurance Policies You May Not Need

Before you purchase an insurance policy, ask yourself if the coverage you’re seeking is something you truly need.

The purpose of insurance is to protect you or your loved ones against unforeseen misfortunes. Insurance agents seldom argue against the need for insurance protection, but there are some policies that just don’t make sense for a lot of consumers.

The need for some types of coverage is obvious. People with dependents who rely on their income recognize the need for life insurance. The prohibitive cost of medicine makes health insurance a must. However, there are other policies whose benefits are questionable.

What follows are several types of insurance that you may be better off without.

Mortgage Protection Life Insurance

Mortgage protection life insurance is designed to pay off your home loan if you die while there’s still a balance owed on your mortgage. Because the liability of a borrower decreases over time, the policy’s face value also decreases, even though your premiums may remain the same. Because policies vary, you should review the terms of your insurance contract carefully.

If you sell your house, the mortgage protection policy terminates, notes Lingke Wang, co-founder of Ethos Life Insurance. Consumers should be aware that if they die, the insurer likely will send their benefit to their mortgage lender. The insured’s family won’t see the money, though they will be freed from the burden of making further mortgage payments.

Wang recommends buying term life insurance coverage instead of mortgage protection life insurance. Under a term policy, your named beneficiaries can choose how to use the insurance money, if you die.

Comprehensive and Collision Auto Insurance

Many motorists buy optional collision and comprehensive policies for added protection of their vehicles, and auto lenders will often require borrowers to carry such insurance on a newer car. But such coverage often doesn’t pencil out for the drivers of older cars.

Collision protection will pay to repair or replace your vehicle, no matter who is at fault in an accident. Comprehensive coverage pays for damages not caused by collisions, up to your policy limits. Such losses may include fire, theft, vandalism, damage from weather-related events, glass damage, and damage caused by striking an animal with the vehicle.

But Tony Steuer, a financial preparedness advocate who specializes in insurance, warns that buying collision and comprehensive coverage for a car that’s more than 10 years old may not be cost effective. You need to weigh the cost of your extra premiums against what you’re likely to receive from your insurer if you file a damage claim. Insurance companies won’t pay more than the market value of your vehicle.

If repair costs approach the value of an older vehicle, it likely will be declared to be a total loss. In that case, you’ll receive a check for your car’s market value. “Sometimes repairs can cost more than the value of a car,” says Steuer.

Life Insurance for Children

While insurance companies do insure the lives of children, some critics say such policies are a waste of money for most consumers.

Steuer says the main purpose of life insurance is to lost replace income and support dependents after the insured person dies. Because children typically have no income, it makes much more sense to insure the lives of the parents to make sure that children are cared for, he adds.

When insurance is sold to cover the lives of children, it’s often in the form of a permanent or “whole life” policy. More expensive than fixed-term policies, permanent life insurance gradually builds up cash value. According to Life Happens, a nonprofit organization that educates people about insurance issues, policies for children generally are owned by a parent or grandparent until the child is grown, at which time the child can assume ownership.

A common reason for buying permanent life insurance for a child is that it will protect the child’s future insurability, since it can be maintained in adulthood, even if the child develops a serious illness, Steuer notes. He holds that it’s not possible to predict which children will develop diseases that could make it difficult to purchase life insurance as adults.

Rental Car Insurance

Many people who purchase rental car insurance already are covered by their personal auto insurance policies. Joel Ohman, a certified financial planner and the founder of CarInsuranceComparison.com, says buying rental car insurance is rarely a good choice and may result in having duplicate coverage.

The Insurance Information Institute says before you make a purchase you should contact your insurer to determine the rental car coverage you already have. Typically, whatever coverage you have on your personal car will apply to rental vehicles, if you’re using them for recreation purposes.

Be aware that credit card companies also may provide some rental car insurance coverage, although it’s likely to be limited. Contact your credit card company to determine the level of protection that’s available.

Because most people have some form of rental car coverage already, whether through a credit card, their auto policy, or some form of club membership, Ohman says, “It is usually a good idea for most people to decline the coverage from the rental car agency.”

Accidental Death and Dismemberment Insurance

Buying accidental death and dismemberment (AD&D) coverage may seem like a good idea, but the odds of your collecting on such a policy are slim, says Steuer. You’re insuring yourself against circumstances that are unlikely to happen, which is why AD&D policies are relatively inexpensive.

AD&D is designed to pay out sums for death and various forms of dismemberment. Coverage may include the loss of body parts or functions, such as speech, hearing or eyesight. However, there are exclusions for AD&D claims that should be reviewed carefully before making a purchase. For example, an AD&D insurance policy may not pay a benefit if the insured dies during surgery or as the result of a drug overdose. The policies typically exclude death or dismemberment claims that are the result of warfare.

AD&D often is sold as a supplemental policy for life and disability insurance. It should not be used as a substitute for life and disability policies, which offer broader coverage, says Steuer.

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