In this world, risks are inevitable, and that’s why we have insurance: to mitigate risk. For the price of a premium, you transfer some of your risk to the insurance company; in return, you receive a payout if a problem occurs. The goal is to reduce your exposure to a sudden and potentially catastrophic loss, thus protecting your financial foundation and that of your loved ones. It sounds good, in theory, but some forms of insurance are unnecessary or may not be worth the cost.
To save money, you could self-insure, to some extent, by redirecting some dollars to your emergency fund to use if a loss occurs. “If a person has the discipline to build adequate savings, then they can save unnecessary insurance expenses,” says Charles Sachs, a certified financial planner (CFP) at Kaufman Rossin Wealth in Miami, Florida. One example, he says, is a health plan with low out-of-pocket-costs. “They are more expensive than higher-deductible plans where you rely on your savings, should you need to.”
Reviewing your insurance requirements periodically is a good practice, financial advisers agree. To determine if a certain type of policy is extraneous, look at the potential risk — the probability of filing a claim — and the cost of protecting against that risk, says Landon Tymochko, a CFP at Leslie Roper Day & Associates in Folsom, California. You’ll also want to consider whether the policy is still needed, given your age and circumstances. Below is a list of insurance products that often don’t make sense for many people.
1. Life insurance after you retire
Life insurance is intended to protect your loved ones from a loss of income should something happen to you. The need for it depends on your age and financial situation, says Geoffrey Owen, a CFP at Front Porch Financial Advisory in Charlotte, North Carolina. If you have debt, and your spouse and others depend on you, then it may be a good choice. It may not be if you have little or no debt and your retirement assets are substantial. “Whole life policies don’t make sense for people with no obvious reason for it, including those with a high-net-worth estate plan.”
2. Final-expense coverage
These policies are heavily advertised to people over 50. Do you need one? No, if you have little debt and substantial assets; yes, if you’re still building those assets and want to spare loved ones the burden of covering your outstanding debts, end-of-life medical costs and funeral expenses, should you pass away suddenly.
3. Life insurance for kids or grandkids
When asked about this type of insurance, George Gagliardi, a CFP at Coromandel Wealth Management, in Lexington, Massachusetts, raised a good question: “Your children are not sources of income, so why do you need to insure them?” He adds that life insurance for children is most often sold as term insurance, which has no cash value. Still, in this era of COVID-19 and the potential for future health issues, some parents have been purchasing whole life insurance for their kids to guarantee their insurability in the future. Although adults hold these policies initially, they can be transferred to children down the road. Also, should COVID or its complications take the child’s life, the payout can be used for medical costs as well as funeral expenses. Your financial planner may have more ideas on the subject.
4. Disability insurance as you age
Having disability insurance is a responsible move. But people often carry it longer than they should, observes Seth Benjamin Mullikin, a CFP at Lattice Financial LLC in Charlotte, North Carolina. Because this insurance pays only until age 65, the number of years that you could collect from it after a disabling injury or illness decreases over time. “A 35-year-old paying the same premium could collect for 30 years; if you’re 62, you could collect for just three.”
5. Mortgage life insurance
A policy that will pay your mortgage payment if you cannot may sound reasonable, but these policies are narrow in scope. Your loved ones will receive no additional financial benefit, as they would with a life insurance policy, which also may be less expensive. What’s more, the older you get and the more you pay down your mortgage, the less you need this type of coverage. Yet the premiums will remain the same.
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6. GAP insurance
Guaranteed asset protection (GAP) insurance pays the difference between the amount allowed for the total loss of your new or used car and the balance on your loan or lease. If you put less than 20 percent down and chose to pay it off over a long period — say, five years — then GAP insurance may make sense. But carry it only for the period when the loan balance is more than the value of the car.
7. Dent insurance
This insurance covers repairs of the dents and dings that can occur, with premiums ranging between $300 and $600 a year. Having a 1-inch dent fixed may cost $60 to $110, with an additional $25 to $50 per half inch. And you’ll still have to pay your deductible, which is likely to be $500 to $1,000. Do the math; it’s probably not worth it.
8. Rental-car insurance
If your auto insurance covers you for car rentals, then decline the policy that the rental-car company is offering. “Most auto insurance policies do,” Owen says. Your credit card may also provide rental-car insurance, but read the fine print to determine if it’s adequate.
9. Flight insurance
Traditionally, domestic flight insurance has often been unnecessary. “If you must cancel a flight because of a significant emergency — hospitalization or a death in the immediate family — airlines will nearly always let you rebook,” Gagliardi says. Also, due to COVID-19, many carriers have been allowing passengers to rebook with lower fees — or none. Keep in mind that airline policies vary and have been evolving along with the pandemic and that you may be asked for documentation.
10. Trip insurance
Things get more complicated when you’re planning a trip to another country or taking a cruise, as you may be required to show proof of adequate medical insurance to meet COVID-19 entry requirements. Along with unexpected medical bills, trip insurance can cover damaged or stolen luggage, expenses you’d have should the trip be interrupted for reasons beyond your control. Check to see that the policy you are choosing includes COVID-related events, as not all plans do. Also, see if your current health and life policies overlap with the trip insurance policy, providing some of the coverage you need. Your credit card may offer trip insurance, but read the fine print.
Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.