Some insurances plans are simply not worth getting
If you have followed our financial freedom guide step 5 – rules of buying insurance, you will realize that insurances are meant to cover catastrophic events that can bring you financial ruin you can never recover from.
A good insurance policy can seem expensive. On the other hand, a policy that doesn’t cost much can fool you into thinking that you are getting a good deal for next to nothing. In fact, policies that cost little also cover little – they’re priced low because they do not cover large potential losses at all.
Avoid insurances that don’t matter
In this article we will go through a list of “small-potato” insurance policies that are generally a waste of money. Sure, getting reimbursed for the event that something goes wrong is comforting, but consider all such small policies that you may take up over the course of your life.
Each of these policies may not cost much, but you’re not going to come out ahead in the aggregate. These policies are not worth the cost relative to the small potential benefit.
Extended warranty and repair plans
Extended warranty and repair plans are expensive and unnecessary insurance policies. Product manufacturers’ warranties typically cover any problems that occur in the first year to up to several years.
After that, paying for a repair using your own money won’t be a financial disaster. Reputable manufacturers often fix problems or replace the product without charge after a warranty has expired, provided it is within a reasonable time period.
Home warranty plans
Typically, when you buy a home, your real estate agent or the seller of the home would offer to pay the cost of a home warranty plan for you. If that’s the case, graciously accept it (out of courtesy, of course).
However, if you do not have a home warranty plan, do not buy this type of plan for yourself. In addition to requiring some sort of fee (around $50) for a contractor to come and look at a problem, home warranty plans have a lot of limits on how much they’ll pay for your home problems.
Your money is best spent to hire a competent inspector to uncover problems and fix them before you purchase the home. If you buy a house, you should expect to spend money on occasional repairs and maintenance, don’t waste money purchasing insurance for such warranty when you have to top up and adhere to many limitations when claiming.
Credit life and credit disability policies
Credit life policies pay a small benefit in case you die with an outstanding loan. Credit disability policies pay a small monthly income in the event of your disability.
These policies are usually offered by banks and their credit card divisions. Some companies sell insurance to pay off your outstanding credit card bill in the event of your death or disability, or to cover minimum monthly payments for a temporary transition in life (loss of job, divorce, etc).
These insurance policies are a waste of money because given what little insurance coverage you are buying, the policies are usually extraordinarily expensive. If you need a cost-effective life or disability insurance, compare and purchase direct from the insurers. If you want to pay off your outstanding credit card debt, follow step 3 of financial freedom guide – clear debts fast.
Daily hospitalization insurance
Hospitalization insurance policies that pay a certain amount per day, such as $100, prey on people’s fears of running up big hospital bills. There is no doubt that healthcare is expensive, but this is not what you need.
What you really need is a comprehensive (major medical) health insurance policy. If you have a major illness, one day in the hospital can lead to thousands, or even tens of thousands of dollars. Getting $100 a day is like sprinkling water to a burning house. Daily hospitalization policies just don’t cover the big expenses.
Remember the rule of getting an insurance – cover the big amounts, don’t sweat the small stuffs! You only want to insure what can be financially disastrous to you, such as contracting a major dreaded disease and rendered unable to work. If you do not have a comprehensive health insurance policy, make sure you get one!
Little stuff riders
Many policies that are worth buying, such as auto and disability insurance policies, can have all sorts of riders added on. These riders are extra bells and whistles that are attached to the main policy and are generally not worth it.
However many insurance agents like to recommend these due to high profit margin they provide for these agents. For example, most health insurance policies have riders that pay you $50 to $100 a day during hospitalization by adding a few bucks to the monthly premium.
As stated earlier, what you want to insure is the big amounts. In the long run, you are better off saving the extra premium every month and invest them in money producing assets.
There are also small insurance policies that are sold as add-ons to bigger insurance policies that are usually way overpriced. For instance, you can buy some disability insurance policies with a small amount of life insurance added on. If you don’t have a life insurance and need one, purchasing a sufficient coverage in a separate policy is less costly.
There you have it, the 5 insurance plans that are not worth investing your hard-earned money in. Have you purchased any policies that you came to regret somewhere down the road? Share your experience in the comments below.
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