Insurance Woes: Separating the Good from the Bad

Your mailbox and email box is likely stuffed with insurance offers. Some types of coverage —like auto, homeowners, and life—is often essential, while the need for other kinds of insurance is questionable, or even doubtful. Here’s how to decide whether it’s better to pay up or take a pass:

Mortgage Insurance. This type of coverage will pay off your mortgage balance in the event of death or disability.
“Mortgage disability insurance is expensive and pays only your monthly mortgage during the first 24 months of disability if you’re unable to do the important duties of your occupation,” explains Frank N. Darras, insurance attorney based in Ontario, California. With the much cheaper term life or disability insurance, the proceeds can be used to pay the mortgage or other debts.

Credit Insurance. This coverage will pay your monthly installment bills, like credit card, auto, and school loans if you die or become disabled. Other forms of the policy pay if you get fired from your job (or lose it because of a catastrophic event, like a natural disaster). Instead of buying this type of insurance, which is expensive given the relative value it offers, consider regular term life and disability. Both are less costly than credit or mortgage insurance, and regular disability replaces up to 70 percent of your income should you be unable to work.

“Wouldn’t you rather be in control of how you spend your monthly disability benefit?” asks Darras. “Disability policies protect your most valuable asset, your earning potential, so why not get as much as you can afford so you can decide what’s best for you and your family.” There’s often an initial waiting period, so be sure you have an emergency fund to pay bills before benefits kick in. “”You may be able to save on the premium if you extend your waiting period from 90 to 180 days,” says Darras.

Extended Warranties. Basically, when you’re talking about big-ticket items that are costly to repair or replace, such as cars or plasma TVs, an extended warranty or service contract is probably a good idea. It doesn’t pay, though, if the cost of the warranty is too close to the cost of the item in question; so, for example, a $30 service agreement on a $100 iPod it isn’t really worth it.

Homeowners Warranties. A homeowners warranty guarantees to repair or replace appliances, as well as major systems like electric, plumbing, heating and air conditioning, for the first year after closing. Considering that these products and systems are pretty expensive—and that they’re typically not included in a home- owners insurance policy—this warranty is well worth it. Although the seller offers the warranty, an insurer provides the coverage. As with all insurance companies, check their financial strength at a credit rating agency like A.M. Best (www.ambest.com) or Fitch Ratings (www.fitchratings.com).