by Patricia Amend, AARP,
September 22, 2021
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.
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.
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