Insurance Comes in Many Forms, But Some Might Not Be Worth Buying

Insurance You Probably Can Do Without

• Private mortgage insurance: This is a type of insurance coverage that impacts about 25% of homeowners. When you purchase a house, the mortgage company wants to make certain that it won't be left holding the bag if you skip town without paying off the loan. Unless your down payment is not at least 20% of the purchase price, you probably will have to purchase PMI. The policy's purpose is to secure the lender's investment, but by doing so, it can help you buy a home with a much smaller down payment. But the bad news is that you will pay for it in the long run, since premiums can amount to as much as a 13th mortgage payment. Don’t forget that once the outstanding balance on your mortgage drops below 80 percent of the original value of the home, federal law says your lender must notify you that you can cancel the insurance. If your home has appreciated rapidly, unlikely in this economic environment, you can also apply to cancel it, but you'll probably have to pay for an appraisal to substantiate your home’s current value.

• Service contracts:   These "extended warranties" are usually not worth purchasing. A service contract is simply a promise on the part of the seller to perform or pay for certain repairs or services, should they be needed in the future. The truth is that service contracts often duplicate coverage that is already provided by the standard warranty that comes with a new car or an appliance. The trick is to read your regular warranty carefully, and then compare it to the coverage provided in the service contract. Often, you can purchase service contracts at a later date, after the original warranty expires.

• Separate policies vs. riders:   Buying separate policies to cover things like boats or RVs may not be a good idea. While some policies provide added liability coverage and other features, check to see if supplemental coverage is available through your existing homeowner’s policy. A major reason is cost, since when you add a "rider" to an existing policy, it usually costs less than trying to buy a separate new policy. Also, many of these "things that move" are already covered by your homeowner’s insurance, but perhaps do not provide the amount of coverage that you want or need. Choices such as these underscore the importance of doing business with a knowledgeable property and casualty insurance professional.

• Flight insurance:  This coverage is usually inexpensive, but other than impressing your spouse, it is simply not worth the price. Statistically speaking, you could fly on a major airline every day for 26,000 years before you'd be involved in a plane crash. Even then, the odds are that you'd survive that crash. Moreover, you may already have flight insurance, if you purchased your plane ticket with a credit card. Some credit card companies give you $100,000 in coverage just for charging your ticket on their card.

• Credit insurance: This insurance is often pushed on unknowing consumers. The most important thing to remember about credit insurance is that a lender cannot make you buy it. While there are several variations (including credit life insurance, credit health or disability insurance and credit unemployment insurance), they all do the same thing: They pay the lender if you can't. So why would you want to pass on credit insurance? Well, for one reason, you might have enough life insurance, disability insurance or assets to cover your debts. Besides, you might be able to buy a standard term life insurance policy for less than what credit life would cost, and the death benefit might be higher.

Got a financial planning question for Greg? You may email him at greg@lifesolutionsonline.net

And for more advice, check out these Athens insurance agents.

Greg Roberts is a graduate of Clemson University with a B.S. degree in Industrial Management. He also holds an MBA from the Wharton School at the University of Pennsylvania. With more than 35 years of financial and estate planning experience, Greg is a • Certified Financial Planner™ • Chartered Life Underwriter • Chartered Financial Consultant • Certified Employee Benefit Specialist • Expert with a Certificate in Long Term Care • Enrolled Agent, licensed to represent taxpayers before the IRS. Full disclosure: he's also the older brother of Athens Patch editor Rebecca McCarthy.