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Insurance You Should Never Purchase

Recently I have come across many great articles about what types of insurance you should carry. In fact Mustard Seed Money had a great monster article  covering all aspects of the types of insurances you should have. The only thing that seemed to be missing was something about the insurances you should skip. So consider this my contribution.

Gap Insurance

You typically encounter gap insurance when you buy a car. The pitch is the value of a car depreciates the minute you leave the lot. As such if you take a low down payment loan on your car there is a risk if you are in an accident that you will stuck paying out of pocket the difference between the loan amount and the worth of the car. You typically pay this insurance up front. The problem of course is this insurance assumes you owe more on your car then the car is worth. The thing is, if you truly want to be on the right financial path you should never buy a car you could not afford to pay for out right. If you take a loan it should be to earn a better return on your money than the loan amount. In the case where you are taking a loan the same as cash there really is no benefit to taking gap insurance. If you paid cash you would have been required to pay the entire amount of the loan anyway, regardless of what occurred later. Save the 500-1000 dollars for something else.

Mortgage linked Life Insurance

Anyone who has bought a house has likely been inundated by these advertisements soon after. Insure your home and they will pay it off if you die. The problem is with the outcome and the cost. Typically these are more expensive than term life insurance. In addition as you increase your equity in your home the payout amount generally decreases. There are even some exotic options. For some policies you can get a fixed payout minimum, though it will cost you more than a traditional policy. Alternately some policies promise a return of unused premiums. The problem of course being you lose out on compounding for used premiums. Ultimately these are inflexible and have a lower benefit per dollar then the traditional term life insurance policy you should buy.

Whole Life Policy

I have written on this one before.  Other then stating again insurance is not an investment vehicle I will not rehash those discussions here.

Private Mortgage Insurance

This one is often not voluntary. Essentially it is an insurance to cover your bank in case you default on your home. This insurance is typically required if your Loan to Value, or the amount of loan compared to the lesser of the appraised value of your home/ your home purchase price, is greater than 80%. In some states there are even costs to have the Private Mortgage Insurance Removed. As such you should always insure when buying a home you can put down at least 20%. You can potentially use a second mortgage for a rental to get below the limit, though I tend to prefer the 20% limit for other reasons. Private Mortgage Insurance (PMI) delivers zero value to you the purchaser which is why you should avoid it.

Extended Warranties

This ones a bit of a controversial answer and I do stray a bit in the middle. Honestly it depends on what the warranty is on. I have bought a older car in the past with a lower cost extended warranty and it was worth every penny and then some. But these days you often get extended warranty offers on stupid things. I was once offered a Warranty on a 40 dollar toaster for 10 dollars… In general unless there is a massive potential cost avoidance or an above average risk of breaking I would recommend never bothering with an extended warranty.

If you do require an extended warranty I would recommend you shop around. For example with new car extended warranties I have found certain dealerships provide the same warranty at lower rates then my local dealerships do. Often its’ with the same warranty company and they do not require you to have purchased the car from them. So if you do insist remember to shop around. Just whatever you do, do not buy from one of those spammer warranty companies that cold calls my phone about once a month with a car warranty.

Long Term Care Insurance

This also might be a bit controversial, but I would not bother with Long term care insurance. Usually this insurance excludes the first 90 days of home care. About 70 percent of society will need longer term care.  The problem of course is 70% of seniors that go into a home are discharged before 90 days are up. That means only about 21% of seniors will ever use these policies. Add to that a cost that rises over time and averages around 3K a year around the time you need it and the value of this insurance begins to look dubious. At a typical cost of long term care of 250 dollars a day a few years of putting the premium into savings and you can cover most expectations of long term care need. In effect if you can afford the premium you can likely self insure and make out ahead.

Car Rental Damage Insurance

Most Credit Cards these days include Rental Car Insurance. Unless you credit cannot support such a card you should always be covered. As such you should always decline this insurance. Some exceptions exist if you rent something like a moving van so check your card policy.

Water Line Insurance

I’m sure those who live on city water have seen the scare tactics. Buy insurance for your water line or you could end up paying thousands. The thing is, have you ever met anyone who has had to replace a water line? It’s an unlikely occurrence and if it does occur is likely to happen in a single spot only costing a few thousand dollars. It is just not worth a purchase.

Collision Insurance

This is another one that is relative. Collision Insurance pays for damage to your car if you are in an accident. If you have a cheaper older paid off car there is no reason to have this coverage. Now if you have a new car you probably should be covered. If you have a loan you may be required too. But if you have a junker you drive around consider dropping this coverage.

Investment Insurance

There are a large category of exotic Hedge Funds that provide extra downside protection or investment insurance.  The problem here is two fold.  One they tend to have high expense fees.  Two they tend to decrease your return in the good times significantly.  Add the two together and over the long run you are better off in a normal index fund despite the vagaries of the market.

 

What Other types of Insurance You Should Never Purchase

Do you have any other examples of insurance you should never purchase I may have missed? Anyone disagree with my assessments?

10 Comments

  1. Sean @ Frugal Money Man
    Sean @ Frugal Money Man January 17, 2018

    Another subject that should be taught to 18 year olds entering the workforce or going to college is this. Insurance and the type of insurances you will need AND not need.

    Thank you for sharing this!

    • FullTimeFinance
      FullTimeFinance January 18, 2018

      Thanks for stopping by FMM

  2. Mr. Need2Save
    Mr. Need2Save January 17, 2018

    I normally don’t take rental car insurance, but I did opt for it on a trip to England. It was our first time in England (other side of the road and other side of the car) and I also rented a manual transmission.

    I did hit a few curbs during our time there and got a few scratches. When we turned the car in, the guy was marking down all the issues. My answer – I got full coverage rental insurance, sorry buddy.

    • FullTimeFinance
      FullTimeFinance January 18, 2018

      European rental cars a bit of a different beast. The majors seem to check for even any minor scratch.

      Still from what I can tell most credit cards have it covered in full. They do only cover the deductible if you really hose things and your insurance kicks in though.

  3. Erik @ The Mastermind Within
    Erik @ The Mastermind Within January 19, 2018

    I have private mortgage insurance, but that’s because I didn’t put 20% down. I’ll be getting rid of it shortly.

    I agree with a lot of what you’ve put on here… I never thought about the collision insurance as being something unnecessary, so thanks for that.

    I’m looking forward to your business post. Thanks for sharing your thoughts on my blog this morning.

    • FullTimeFinance
      FullTimeFinance January 20, 2018

      It should hit in another week or so.

  4. Mr. 39 Months
    Mr. 39 Months January 19, 2018

    Good article. They sell a lot of insurance now that isn’t necessary, and they’ve got great margins on it. A sucker is born every minute.

    For insurance, figure out what you need for a major disaster and insure that. Otherwise, self insure, like he says above.

    I’m just about to hit FI. About 18 months later, my one life insurance policy (term) will end. I won’t renew it, because there isn’t a need anymore.

    • FullTimeFinance
      FullTimeFinance January 20, 2018

      Exactly. I look forward to the day I cancel our life insurance as it means we’re fi.

  5. Dani
    Dani January 29, 2018

    I will take a caveat gap insurance, if you can get it not from the dealer. Many people start out in the wrong place–which is to say that they may already be upside down in a car. We had just such a situation when we first got married and hubby had bought a car shortly after a bankruptcy, so he had a fairly steep interest rate, and the balance didn’t go down very fast on the loan (it was a used car, even; we won’t discuss his poor negotiating strategies at getting a better-priced car; you’ve already discussed the bad idea surrounding buying a car that you “can’t afford” when you have to get such a large loan). It just so happened that he didn’t purchase gap insurance at the dealer, but that our insurance company offered it–and it was a measly $5 per month. Well, lo and behold, when our teenager was driving when another car wrecked into our car, our gap coverage more than paid for itself by covering the gap that their insurance was willing to cover. It meant that we still ended up paying our deductible even though it wasn’t our fault, but it kind of behaved like underinsured coverage at that point: we would have owed another $3500 on a car that was in the junkyard if we hadn’t had that coverage.
    Moral of the story: don’t ever buy any extras from the dealer or lender, as you can get better coverage for better rates through your regular insurer, and then you can also drop that particular coverage as you pay down the balance, etc., similar to dropping collision coverage.
    Great list here, and whether everyone agrees with everything on this list, it at least gets us all thinking!

    • FullTimeFinance
      FullTimeFinance January 29, 2018

      I always appreciate different takes. I also wholeheartedly agree on going somewhere else for the insurance then the dealer.

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