Many services act as emergency funds, in a way — insurance, basically — for very specific situations. In exchange for a monthly or annual premium, these companies promise to ease the financial burden of an emergency or provide cash when you need it most.
But are these services worth it? Would you be better off just putting that money into a fully stocked emergency fund?
Four Partial Substitutes for an Emergency Fund
Let’s take a look at some of the most popular protections out there to see what exactly they offer — and how much they cost:
AAA or Roadside Assistance
Cars are a common source of unexpected – and expensive – problems. When your car breaks down on the side of the road, whom do you call? If you’re a member of AAA or another roadside assistance company, you can rest assured they’ll help get you home and get your car to the shop. (Your car insurance policy may also offer some type of roadside assistance coverage.) While costs for this service vary by company and location, a basic AAA membership runs from about $50 to $70 per year. That includes:
- 24/7 roadside assistance benefits
- Free AAA maps, TourBook guides, and TripTik routing maps
- Member-only discounts on auto and homeowners insurance
- Travel planning services with exclusive savings and special member benefits
- Access to discounts at more than 150,000 retail locations around the world
Frequent drivers and owners of older and used cars will obviously get more value out of this service. But even then, what if your car doesn’t break down? When that’s the case, you’re simply paying $50+ per year for peace of mind.
If you take advantage of the many discounts and perks that come with being an AAA member, that level of comfort may very well may be worth it. If you don’t, however, that annual membership could be money down the drain.
What’s more, roadside assistance only gets you to the mechanic’s shop — it won’t cover expensive repairs like new tires or replacing the alternator.
Whether you’re buying an automobile, a refrigerator, or a toaster, you can purchase an extended warranty that guarantees repair or replacement of your item for several months — or even years — after the manufacturer’s warranty expires. If your dishwasher or dryer breaks, such a warranty can mean the difference between a costly hassle and a free phone call. But are these extended insurance policies a good idea?
According to recent coverage from Consumer Reports, extended warranties on automobiles are an “expensive gamble.” Reportedly, 55% of those surveyed who purchased an extended warranty on their car — the average cost of which is about $1,214 — never used the coverage.
Extended warranties on electronics and appliances can cost anywhere from $20 to several hundred dollars. It’s important to note, however, that most expensive consumer goods come with a 12-month warranty already. And how you pay for the product matters as well. For example, some of the best credit cards out there offer extended warranties on certain expensive products if you use your card to make a purchase.
Identity Theft Protection
You have good reason to be worried someone might steal your identity. According to the National Criminal Justice Reference Service, the Federal Trade Commission received 2 million complaints of identity theft and fraud in 2013.
To help you prevent an identity theft disaster, companies like LifeLock offer credit monitoring and restoration in the event of identity theft for $8.99 to $26.99 per month. With their top-tier plan, you get identity theft and credit monitoring, plus special perks such as lost-wallet protection, identity monitoring, and data breach notifications.
What they don’t tell you, however, is that you can do a lot of this yourself for next to nothing, as Consumer Reports has noted. You can get a free copy of your credit report from all three credit reporting agencies through AnnualCreditReport.com — just stagger your requests throughout the year so you can review one of them every four months. What’s more, credit card fraud is by far the most common type of identity theft — and you’re only on the hook for the first $50 in fraudulent credit card charges.
When it comes to supplemental insurance providers, few stand out as much as Aflac. With its quirky duck persona, legions of salespeople, and promise to cover you in the event of an emergency, the company has grown to cover more than 50 million people worldwide.
Current products include accident insurance, cancer insurance, critical illness insurance, life insurance, hospital insurance, short-term disability insurance, dental insurance, and vision insurance. When you become sick, hurt, or unable to work, Aflac promises to foot the bill in the form of cash assistance. Since Aflac and other comparable coverage is considered “supplemental,” you typically buy a policy as an add-on to your existing life and health policies. And with so many types of coverage offered, prices vary and may be based on plan type, age of applicant, and level of coverage.
Would You Be Better Off With Cash?
While any of these services can come in handy when you’re in a bind, that doesn’t necessarily mean they’re a good investment. In fact, extended warranty issuers, supplemental insurance companies, and identity theft protection services consistently get a bad rap with user review services like Yelp and Consumer Affairs.
Furthermore, the fact that all of these companies need to make money means someone needs to lose. In other words, like any other type of insurance, you’ll likely pay in a lot more than you ever receive in benefits.
That’s why, chances are, you’d probably be better off forgoing all the “extras” and having a fully funded emergency fund instead. With three to six months of expenses in the bank, you can take care of almost any emergency that pops up, whether it’s work- or health-related, or simply the cost of a repair.
Since you can use cash to pay for anything, a solid emergency fund is the best insurance of all. Start building yours now.
Do you pay for any “extra” services like these? Do you agree that a cash emergency fund is the best insurance of all?