Insurance You Don’t Need

I had a friend come to me and ask what was the best type of life insurance to get for her child? She explained because she saw an ad on TV and it seemed like the proper thing to do. That got me thinking about the different types of insurance that most of us don’t need.

While everyone’s circumstances are a bit different, there are a number of areas where the risk for the situation the insurance policy is covering is quite small and suffering the consequences of the loss is a better risk than purchasing the insurance policy. That doesn’t mean that the unfortunate situation won’t happen. While the risk that something will happen will always exist, the risk is so small that you’re much more likely to come out ahead if you put aside the money you would be paying for the insurance into a savings account.

Here are 5 types of insurance that most people don’t need and shouldn’t pay for:

1. Life Insurance For A Child: These policies are sold purely on emotion and not on true need. The advertisements will appeal that “if you love your child…” you will have a life insurance policy on them. While the commercials may appeal to your emotions, the financial facts are that a loss of a child will actually relieve you of a financial commitment. It cost less not having a child than having one. Life insurance is meant to replace an income that is lost when one dies, and a child rarely has an income. Unless your child is the main source of income for your family, there is no need to have life insurance for him or her.

2. Life Insurance For Singles With NO dependents: for the same reason above, life insurance is to replace an income that is lost with death. If you are single and have nobody counting on the money that you earn, then there is no reason to have life insurance.

3. Comprehensive & Collision Auto Insurance For Older Cars: As your car gets older and is worth less according to Blue Book value, it no longer makes sense to keep the Comprehensive & Collision portion of your insurance. Why? Because when your car is damaged in an accident, the insurance company will only pay what it’s worth. If the Blue Book has it at $2000 and you have a $1000 deductible, the amount you’re paying for the comprehensive & collision is probably not worth the price. It certainly isn’t if your car is only worth a Blue Book value of $1000 since you’d be paying money for nothing.

4. Rental Car Insurance: You want to take a few minutes and call your current auto insurance policy and see what they cover if you rent a car. Then take a few more minutes and call your credit card company and see what insurance they provide if you rent a car using their card. Once you know both of these, you’ll know exactly what you need and don’t need when renting a car and chances are that means you can skip the high price rental car insurance the rental car company will be trying to sell you.

5. Extended Warranties On Appliances: You are almost always better off taking the money you’d pay for an extended warranty and placing it aside in a bank account. They are usually expensive and only are worthwhile for a short window (of maybe a year or two) between when the manufacturer’s warranty ends and the extended policy becomes more expensive than replacing the item yourself.

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5 Responses to Insurance You Don’t Need

  1. thc says:

    Jeffrey: The insurance industry has done a nice job convincing people what kind of “protection” they need and this is a good list but I have to take exception to number one in many circumstances.

    Young families often don’t have much in the way of liquid resources and a funeral and burial can start around $5k. In some parts of the country, it can be as high as $10-15k. “Burial policies” for children are dirt cheap and make sense for families for whom a child’s death would be a financial disaster as well as an emotional one.

  2. pfadvice says:

    While every family need to look at there own circumstances and there are always exceptions to the rule, these are the reasons I disagree.

    1) the chances of a child dying ar minimal
    2) if the family instead takes the premium they would pay and puts it aside and begin saving for the child’s college as they should, they will have the resources to pay in the case that a tragedy does happen.
    3) not to be cruel, but strictly from a financial point of view, many of their monetary resources that were previously earmarked for the child will now be free meaning even if they have to borrow, they should be able to pay it back quickly.

    It is an emotional time and something that nobody should have to go through, but from a financial perspective of risk/reward \, child life insurance just doesn’t add up.

  3. thc says:

    A $5,000 term policy on a one year-old can be had for less than $100/year. So, if a family takes that premium and sets it aside for college, they will have enough to pay for such a tragedy? I don’t think so. Many young families just don’t have the resources to handle a financial disaster of this magnitude.

  4. pfadvice says:

    My apologies if I didn’t get my point across correctly. Taking that $100 in addition to what should be saved for college (obviously, $100 a year isn’t going to cut it for college) would be enough to cover the cost.

    The low price of the premium goes to show that the chances of a child dying are minimal. Insurance companies can charge that because they know that 99% of the policies will never collect.

    Could it happen? Of course. Would it be a financial hardship? Under the circumstances you describe, of course. Does that mean spending $100 for something they most likely won’t need is financially sound? In my humble opinion, no. There are a number of other areas that it could be much better spent considering the risks involved – for example, for disability insurance. An accident to the breadwinner of the family is much more likely to happen than the death of a child and would be far more devastating financially for the family.

  5. Chrees says:

    This doesn’t fall under “life insurance you don’t need,” but more of a take on the comment that “life insurance is meant to replace an income that is lost when one dies.”

    If a spouse earns no income but stays home with the children, the surviving spouse will still wish for an insurance policy for the additional expenses that will occur after their spouse’s death. I’m sure you weren’t ruling out exceptions, but I did want to add that.

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