Insurance You DON’T Need

You can purchase insurance for nearly every possible unforeseen problem in your life.  Some problems, like death, disability, and severe illness are financially catastrophic and you need insurance to protect yourself.  Other problems, such as your car transmission failing or your iPhone screen cracking, are certainly nuisances and will set you back a few hundred or few thousand dollars, but will not cause financial devastation.  I do not recommend insurance for nuisance expenses.  Make sure you don’t over-insure or inappropriately insure by avoiding the following types of insurance.

Whole Life Insurance

Do not confuse this with Term Life Insurance.  Whole Life Insurance, otherwise known as cash value, universal, or permanent life insurance is more of an investment product than an insurance product. Basically, whole life insurance builds up value as you pay the life insurance premiums and you can borrow against this to provide retirement income.  Sounds great in theory, but in practice, whole life insurance is expensive, has high fees, low returns, low flexibility and is difficult to cancel. Do yourself a favor and avoid it at all costs.  If you’re not convinced, learn more at the White Coat Investor.

Short-Term Disability Insurance

Long-term disability insurance typically kicks in after 90 days of disability.  You can also purchase short-term disability insurance, which will cover you for any disability that lasts less than 90 days.  However, I recommend you self-insure against short term disability with your emergency fund of 3-6 months of expenses.  You have an emergency fund, right?

Private Mortgage Insurance (PMI)

Private Mortgage Insurance is not something that you purchase voluntarily.  Rather, it is required if you provide less than a 20% down payment on a home purchase.   PMI protects the lender (not you) if you stop making mortgage payments.  The cost of PMI varies from between 0.5% to 1.5% of the cost of the loan.  For a $500,000 loan, this would be around  $2500 to $7500 per year, or around $200 to $600 per month.  Remember that this is a fee; the money is NOT  going towards the principal on your loan. Sounds like a waste of money to me.  Avoid PMI by saving up at least a 20% down payment for your home.  If you can’t save up a 20% down payment, then buy a less expensive home.

Extended Warranties (Car and Electronics)

All consumer items, including cars and big screen TVs are depreciating assets.  They go down in value over time and will eventually be worthless.  In general, if you can’t afford to replace a depreciating consumer item, then you can’t afford it in the first place.  An exception would be a car, for which you may purchase collision insurance to insure against a complete loss.

You should have an emergency fund to cover unexpected expenses such as the loss of your iPhone, the washing machine breaking, or your car transmission going out. If you don’t yet have an emergency fund of 3-6 months of expenses, then you should be building up your emergency fund rather than buying stuff.

Trip Insurance

There are three main types of trip insurance:

1. Trip Cancellation Insurance: When you plan a trip, you often pay money upfront for airline tickets, hotel rooms, or a cruise.  If you are unable to attend your trip, due to illness, natural disaster such as a hurricane, or bankruptcy of your travel company, you may lose the entire cost of your trip.  This is likely to happen infrequently and is not financially devastating, so in general I do not recommend trip cancellation insurance.  If you happen to be paying for a very expensive trip ($10,000 cruise?), then I suppose there would be a time and place for trip cancellation insurance.  In which case, head over to InsureMyTrip.com.
2. Travel Medical Insurance: In general, your usual health insurance will cover you regardless of whether you are traveling domestically or internationally.  You may pay out of network rates, but thankfully, international care is typically much less expensive than care in the United States!
3. Evacuation Insurance: In the United States, most health insurers will cover the cost of a medical evacuation to the nearest hospital.  However, if you are traveling internationally, they may not cover the cost of a medevac flight back to the United States for specialty care.  A complicated medical evacuation from a remote area can run upwards of $100,000.  If you know you are going to be traveling to a very remote area without medical care where the risk of injury is high (such as climbing Mt. Everest), then you may want to look into evacuation insurance, such as through Global Rescue.

Pet Health Insurance

We love our pets and want them to live a long and healthy life.  However, unlike health insurance for humans, I do not recommend health insurance for pets.

The main reason for this is that medical expenses for pets are much less than medical expenses for humans.  Therefore, for most routine care for your pet, you should pay cash with your emergency fund.

If your pet does develop a very expensive diagnosis such as cancer, you will need to decide whether to pursue potentially expensive treatment.   If you know you are someone that will pursue all possible care, regardless of how expensive, then perhaps it may be worth it to you to purchase a pet insurance with no maximum limits.

Remember that owning a pet is expensive. For example, owning a dog may cost upwards of $30,000 throughout their lifetime.  Make sure you can afford a pet (including all their medical expenses) before adding them to the family.

Rental Car Insurance

Your usual car insurance will cover you while your are driving a rental car.  The only reason to have additional coverage is if you don’t have collision coverage on your beater car at home and you are splurging on a very expensive rental car, for which you would be unable to pay for damages or replacement.

Jewelry Insurance

Renter’s and homeowner’s insurance policies will typically only cover up to$2500 for jewelry.  If your jewelry item (such as wedding ring or engagement ring) is relatively inexpensive and you would be able to replace it with your emergency fund, then you do not need jewelry insurance.  However, if you have a very expensive piece of jewelry (say $20,000) for which replacement would not be feasible, then jewelry insurance may make sense.

Long-Term Care Insurance

Long term care insurance pays for nursing home care for elderly individuals with medical issues (such as severe dementia) who are unable to care for themselves and who are unable to be cared for by family members.  The cost of nursing home care may be as high as $80,000 per year and is not covered by Medicare. It is, however, covered by Medicaid.

If you are very poor (assets < $2000), then you will qualify for Medicaid and will not need long term care insurance.  If you are wealthy (net worth $3-5 million), then your assets will support $80,000 per year in spending, and you will not need long-term care insurance.

If you are in the middle (net worth < $2 million), then you have two options. One option is to spend down your assets until you qualify for Medicaid.  However, understand that not all long term care facilities, particularly the higher-end facilities, accept Medicaid.  Moreover, state laws generally only allow your spouse to keep up to $100K in assets, which may not provide a satisfying lifestyle above and beyond Social Security.

The other option is to purchase long-term care insurance.  Ideally, a long-term care insurance plan would cover an unlimited number of years of care.  However, these plans are apparently becoming either unavailable or cost-prohibitive.  Most plans now provide only 5 years of benefit, which may not necessarily be a good investment.  You can make the decision for yourself by looking up quotes at a site such as Long Term Care Tree.  For more information, you can also see Clark Howard’s article and the White Coat Investor’s article on long-term care insurance.

Ultimately, the best solution is to amass a net worth of at least $3 million in order to self-insure against the possibility of needing costly long term care.

Wrap-Up

There’s no need to purchase insurance for every possible life misfortune.  Guard against true financial catastrophe and self insure against the rest.

Remember, It’s Not About the Money; It’s About the Freedom