Insurance You May Not Need

Insurance is an extremely important financial planning tool. Being hospitalized or getting into a car accident without health or auto insurance would financially wipe out many people. However, not all insurance is necessarily worth the cost.

Life insurance for children
Life insurance allows wage earners to provide income replacement in the event of their death. Few children have income, and even for the ones that do, their parents are generally not relying on it to pay the bills. Life insurance can also cover funeral costs, but the risk of death for most children is very small. Some insurance agents try to sell cash-value life insurance for children as a savings tool, but in general, your money would be better put to use purchasing stocks or bonds or funding a 529 plan (tax-advantaged college savings account). The one situation where purchasing life insurance for a child may make sense is if your family has a history of health problems and you believe it may be difficult for him or her to get insurance as an adult.

Credit life insurance
If you have a mortgage or other loans, you may have received an offer from your lender to purchase credit life insurance, which pays off your debt if you die. It typically benefits the lender more than you. If you are the sole borrower, a creditor cannot go after relatives to collect a debt after your death. (There may be exceptions in community property states.) Your estate is responsible for paying it, but if you have little in the way of assets, the creditor may just be out of luck. If you do have assets and want to ensure that they go to relatives, not creditors, life insurance is a good idea, but you may want go with regular life insurance instead of credit life insurance. With a regular policy, your heirs can decide how to use the proceeds. With credit life insurance, it automatically goes to the lender. If you can get credit life insurance for significantly less, it may be worth it to give up the lack of flexibility, but otherwise, throw that offer in the trash.

Payment protection insurance
Payment protection insurance is a product offered by creditors in which your monthly payments are covered for a set period of time if you lose your job or become disabled. However, if you read the fine print, you may find several loopholes. For example, many plans don’t cover job loss due to poor performance or disability due to a pre-existing medical condition. Furthermore, many creditors are flexible with those who are struggling, offering lower payments through hardship programs free of charge. Even if your creditors do not offer hardship programs, you can set aside the money that you would have spent on credit protection insurance in a savings account. If you don’t need it to pay the bills, you can use it for something else.

Identity theft insurance
There are several types of services that may be offered under identity theft insurance, such as credit report monitoring, advice, and compensation. Paying someone to monitor your credit report is usually not necessarily – you can get a copy of your credit report from each credit bureau free once a year from www.annualcreditreport.com, and you are entitled to additional free reports if you believe you were the victim of identity theft. You don’t have to pay for advice either. (Visit www.ftc.gov/idtheft for free information about dealing with identity theft.) Furthermore, identity theft insurance only compensates you for the costs incurred to clean up the identity theft (e.g., postage, photocopies), not the money that was stolen (which is generally covered by your financial institution). These costs are typically low and may be below the policy’s deductible. However, if you do decide to purchase a policy, make sure to get one that covers lost wages and legal costs.