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.”
But some types of insurance policies don’t make perfect sense, says Nicholas Bunio, a certified financial planner (CFP) at Retirement Wealth in Berwyn, Pennsylvania. Believe it or not, a standard homeowners insurance policy in his state covers volcanic eruptions, which haven’t occurred in 50 million years, but not sinkholes, which have caused serious damage to homes recently.
You can start by looking for any redundancies in all your insurance coverage, Bunio says. His retired parents had extra dental and vision coverage. “Canceling it saved them $100-plus per month,” he says.
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 may not make sense for many people.
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- Rental Car Insurance: Often unnecessary if your personal auto insurance or credit card offers rental coverage. Check with your provider before opting in.
- Flight Insurance: This type of insurance typically covers trip cancellations or medical emergencies related to air travel. Many travel credit cards and regular health insurance policies already provide similar coverage.
- Credit Card Insurance: This insurance usually covers missed payments or balance protection. Credit card companies often offer hardship programs, so this insurance may be redundant.
- Extended Warranties on Electronics: Many electronics come with a standard warranty, and sometimes additional extended warranties are just an extra cost with minimal added value.
- Identity Theft Insurance: While it can be useful, many identity theft protection services offer similar coverage, and some bank accounts provide identity theft protection as part of their service.
- Pet Insurance: If your pet is relatively healthy and you have a good emergency fund, pet insurance might be an unnecessary expense. Evaluate whether the cost of premiums outweighs the potential benefits.
- Cancer Insurance: Often considered redundant if you already have comprehensive health insurance that covers cancer treatments. Check your existing coverage before purchasing this type of insurance.
- Mortgage Life Insurance: This insurance pays off your mortgage if you die, but it’s often more expensive than adding a rider to a term life insurance policy that would cover the same need.
- Wedding Insurance: While it can cover some unexpected issues, many of these risks are often manageable through deposits or credit card protections. It might be worth evaluating the specific coverage versus potential risks.
- Accidental Death Insurance: If you already have life insurance, accidental death insurance might provide overlapping coverage. Check if your current policy includes accidental death benefits before purchasing additional coverage.
These types of insurance might not be necessary for everyone, so it’s essential to evaluate your personal needs and existing coverage before deciding.
