Insurance Woes: Separating the Good from the Bad
When it comes to insurance, there are some policies you need and others you’d be better off without.
While you'd have a hard time doing without auto insurance, homeowner’s insurance and life insurance, you can get by without other types of coverage.
How do you decide whether to pay up or take a pass? Here are some types of insurance you can do without and alternate options for coverage:
Mortgage insurance. This type of coverage pays off your mortgage balance .in the event of death or disability.
"Mortgage disability insurance is expensive and pays only your monthly mortgage during the first 24 months of disability if you're unable to do the important duties of your occupation," explains Frank N. Darras, an insurance attorney based in Ontario, California.
What’s a better option? Buy an inexpensive term life insurance or disability insurance policy. It will allow your family to choose how to use the funds. They can pay off a mortgage or credit card debt, or they can invest the .cash and live off the interest. When it comes to a financial emergency, the more flexibility your family has, the better off they will be.
Credit insurance. Similar to mortgage insurance, credit insurance pays your monthly installment bills, like credit card balances, auto loans and school loans, if you die or become disabled. Other forms of credit insurance pay if you get fired from your job—or lose it because of a catastrophic event, like a natural disaster.
Instead of buying this type of insurance, which is expensive given the relative value it offers, consider buying a regular term life or disability policy. Both are less costly than credit insurance, and regular disability coverage replaces up to 70 percent of your income should you be unable to work.
"Wouldn't you rather be in control of how you spend your monthly disability benefit?" asks Darras. "Disability policies protect your most valuable asset, your earning potential, so why not get as much as you can afford so you can decide what’s best for you and your family?"
Disability policies often have an initial waiting period, so be sure you have an emergency fund to pay bills before your benefits kick in.
"You may be able to save on the premium if you extend your waiting period from 90 to 180 days," says Darras.
When it comes to disability insurance, you may be able to save on the premium if you extend your waiting period from 90 to 180 days.
Frank N. Darras
Insurance attorney
Extended warranties. Having a warranty on a big-ticket item is a good idea, and major manufacturers offer general warranties on their products.
But sometimes you have the option to extend the warranty or sign up for a service contract. When is that a good idea?
If you're buying a car that has a five-year warranty and you have the option of extending the warranty for three years for an additional $1,000, it's probably a good idea to pick up the option if you plan to keep the car past the initial warranty period.
Existing home warranties. An existing home warranty provides for the repair or replacement of existing home appliances and major systems like electric, plumbing, heating and air-conditioning for the first year after you close on the property.
Considering that appliances and major mechanical systems are expensive and are typically not included in a homeowner's insurance policy, buying an existing home warranty can be a good idea. You'll be given a toll-free number to call in case of a problem. Most reputable warranty companies will send someone out to inspect the problem and either fix or replace the item within 24 hours.
You'll have to pay a service fee, usually $35 to $70 for each visit. The average homeowner who has an existing home warranty typically calls the toll-free number one or two times a year.
Nationwide, many home sellers are buying existing home warranties as a marketing tool for their properties. In California, nearly 9 homes out of 10 are sold with an existing home warranty. But homeowners can purchase an existing home warranty for their homes even if they are not selling.
Be sure to thoroughly check out the company selling the warranty and read the fine print so that you understand exactly what you’re paying for.
Marcy Tolkoff JD, has been a writer and an editor for almost 20 years. Tolkoff was a staff editor at Woman's World magazine, where she edited articles in a broad spectrum of fields over a period of 13 years, the last 6 of which were exclusively centered on personal finance. She is a member of the Society of American Business Editors and Writers and the New York Financial Writers Association.