Insurance policies you don't need

Some coverage just isn't worth the cost

Consumer Reports magazine: May 2012

When consumers buy insurance such as auto, health, home, and life, they're protected from potentially devastating losses for a relatively small cost. It can be just the opposite with some other types of coverage, where small threats are hyped, overpriced premiums seem reasonable when chopped into daily installments, and promises shrink in the fine print. Here are seven products to avoid.

Credit insurance

The promise with the two main types, typically sold by lenders when you apply for credit, is that they'll pay off all or some of your loan balance if you die or become disabled. The premium can be "a few pennies a day," one purveyor says.

But credit life insurance can be more pricey than life insurance: $370 a year on a $50,000 loan, for example, vs. $92 a year for the same amount of term life for a healthy 40-year-old man, says Wisconsin's Department of Financial Institutions. And a credit life policy can pay out only on a declining loan balance, whereas a term policy would pay its full face value.

Claims based on disability might be denied because of a pre-existing condition or how broadly the policy defines "totally disabled." You might already have disability coverage at work, and it can be cheaper to buy adequate life insurance coverage.

Pet insurance

Like health insurance for people, pet policies usually come with exclusions, co-payments, deductibles, yearly or lifetime caps, and other limits, which boost out-of-pocket costs on top of monthly premiums. Last year when we analyzed nine pet policies over the 10-year life of a generally healthy beagle with only common ailments, none paid more in benefits than its total cost, and only five did so when we added some serious hypothetical problems. Instead, budget $200 to $300 a year for routine pet health care.

Cell-phone insurance

These plans provide a replacement if your phone is lost, stolen, or accidentally damaged. Monthly premiums of $5 to $7 and deductibles of $25 for lesser-value phones to $199 for smart phones can add up. If you file a claim after 18 months, you'll have paid a total of $115 to $325, and the insurer might replace your phone with a refurbished model.

Of course, accidents do happen. But in a 2009 survey we found that only one in five readers who bought a new phone in the previous two years did so because the old one was lost, stolen, or broken. Instead, keep your old phone after you upgrade so that you can reactivate it if necessary.

Dread-disease policies

You're promised benefits if you get the disease named in the policy. But you'll get nothing if some other malady befalls you. Even if you bet correctly, the devil is in the details. Take cancer policies: Most don't cover related illnesses such as infection and pneumonia, and many have fixed-dollar or time limits on payouts. Some policies pay only for hospital care, but many cancer treatments are often done on an outpatient basis. Protect yourself properly with comprehensive health and major medical insurance.

ID-theft insurance

Identity-protection services, which charge $120 to $300 a year, sometimes throw in up to $1 million in insurance to pay costs associated with ID theft. But you'll often pay no out-of-pocket costs because of federal protections. And those who do incur costs lose an average of just $354. Instead, protect your data by placing a freeze on your credit reports at Equifax, Experian, and TransUnion, and monitor your bank and credit accounts regularly.

Flight insurance

If you buy a policy right before boarding an airplane that crashes, your beneficiaries collect if you die. But again, you're better off with term life insurance. (Don't confuse flight insurance with the type of coverage that will pay your costs if a health problem forces you to cancel a trip.)

Child life insurance

"For less than $1 a week you can give your child a lifetime of life insurance protection," says Gerber Life about its Grow Up Plan. Premiums on a 2-year-old California boy can run from $3.34 a month for a $5,000 policy to $32.08 a month for $50,000. This whole-life policy is also pitched as a financial "head start" investment that accumulates cash value.

The purpose of life insurance is to protect dependents, so child life insurance is unnecessary. Even if you want coverage for burial costs, you're unlikely to collect since the death rate for those 1 to 14 is low. It's not even much of an investment. In 20 years you'd pay $1,602 in premiums for a $10,000 juvenile policy, but the guaranteed cash value would reach only $1,536.

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