These days, it seems like every other television commercial is for yet another insurance product. While consumer choice can be a good thing, not all insurance is as essential as the ads make it seem. “There’s a lot of sales and marketing based on fear that especially targets retirees,” says Jonathan Howard, a certified financial planner with SeaCure Advisors in Lexington, Ky., as well as a former insurance salesman. “People end up buying because they’re terrified of a loss rather than to cover an actual insurance need.”
Although Howard believes insurance plays an important role in anyone’s financial plan, some products are more about protecting the insurance company’s bottom line rather than yours. Insurance decisions shouldn’t be made in a vacuum. They should consider your entire financial picture. That way, you can identify the gaps and figure out the coverage you truly need, along with any you could do without. Above all, never buy insurance hastily based on fear, especially if it involves the products on this list.
If you’re still working but nearing retirement, consider whether your long-term disability coverage is worth keeping. The premium for an employer group plan typically increases with age, says Greg Klingler, director of wealth management at the Government Employees’ Benefit Association in Fort Meade, Md.
The policy also will limit the payout period until a particular age, such as 65. As this age nears, your maximum possible benefit shrinks. This is especially true for someone who could have retired earlier but is still working. “You’re no longer dependent on your salary, so weigh the value of protecting this extra income versus the high insurance cost,” says Klingler.
When you buy merchandise like computers, televisions, smartphones, and home appliances, chances are the vendor will try to sell you an additional warranty to replace or repair the item after you buy it. Ask yourself whether you have enough savings to replace the product yourself.
By design, insurance must collect more in premiums than it pays out, making it a net negative for the average policyholder. Most policyholders collect nothing.
For major assets like a house or vehicle, most people would find it difficult, if not impossible, to replace them out-of-pocket, so insuring these assets with a home or auto policy makes sense. But for smaller things that you could easily replace yourself, like a $700 laptop, skip the warranty and self-insure instead.
Critical Illness Insurance
A stroke, heart attack, life-threatening cancer and an organ transplant are just some of the serious health issues that critical illness insurance covers. If you develop one of these conditions, the insurer sends you a lump sum cash payment, ranging between $10,000 and $50,000, that can be spent however you want.
Despite this flexibility, Howard isn’t crazy about this type of insurance, “where unless a specific situation happens, you don’t get anything back.” He suggests reviewing your potential out-of-pocket costs for health insurance to see whether you need critical illness insurance or if you could manage the bills with savings.
Social Security Insurance
All the dysfunction and uncertainty in Washington has led to a new product: Social Security insurance. It’s a type of annuity, an insurance contract that turns part of your savings into future income. When you add this insurance to an annuity, the insurer promises your annuity payment will increase to cover any government shortfall that results in a smaller Social Security benefit.
Howard doesn’t think this is a good return on your money. “Retirees vote, and they predominantly live in swing states,” he says. “If the government ever reduced Social Security for people already claiming it, they’d never hear the end of it.”
Perhaps benefits will be cut for future generations, but Howard doesn’t expect those already collecting benefits to have a problem.
Individual Dental and Vision Policies
Travis Price, a Medicare insurance agent in Traverse City, Mich., does not think individual dental and vision policies are worth buying in retirement. “When people are working and get group dental/vision, the insurance coverage is heavily subsidized in the group and by their employer. When they get into the individual marketplace, the coverage costs can increase 10-fold for less coverage.”
Not only are premiums higher for individual plans, but they could also have high out-of-pocket costs for care, an exclusion of major services for the first year of coverage, and a limited annual coverage limit. Price says an entry level plan meant to cover both dental and vision can be capped at $1,500 per year. “Often, seniors are better off simply being a cash patient and negotiating cash costs with their provider,” says Price. Another alternative, he says, is finding a Medicare Advantage plan that includes dental and vision coverage.
Long-Term Care Insurance
No one disputes that long-term care in the United States is an expensive risk. A private room in a nursing home costs more than $90,000 a year, on average, according to the U.S. Department of Health and Human Services.
Still, both Howard and Klingler dislike traditional long-term care insurance policies because of their high premiums. “The cost varies based on the carrier, the amount of coverage and the applicant’s health, but I’ve seen [premiums] around $5,000 a year for a couple in their 60s, $10,000 a year when they’re in their 70s,” says Howard. He also notes that premiums rise over time based on age even after you sign up.
Howard says traditional long-term care insurance is another example of insurance that only applies under such narrow, specific circumstances that it’s not worthwhile, particularly given its hefty cost. As an alternative, he prefers an LTC-hybrid life insurance policy because that way, if someone doesn’t need long-term care, the heirs receive the death benefit instead.
Klingler suggests considering other resources before buying any long-term care policy. “In almost all cases, you don’t need to cover the full cost [of care],” he says, because some expenses, like food, housing and utilities, would be provided by the long-term care facility.
Even when one spouse enters long-term care while the other remains in the couple’s home, some daily living expenses are still reduced. If you’re considering long-term care insurance, ask yourself whether you need to cover the full cost of a nursing facility or if you could go with a partial benefit that’s more affordable.
Rental Car and Travel Insurance
It happens in a flash. You’re at the rental car counter at the start of a trip, when the agent asks if you want insurance. Well, why not get it? It’s only another $12 to $15 a day. The thing is you might already have rental car insurance through your credit cards, auto policy and membership in an organization like AAA.
Your credit card may provide other types of travel insurance as well, such as coverage for lost bags, trip cancelation, emergency evacuation, and emergency medical and dental insurance during the trip. Your health insurance may cover you for medical emergencies, too. Before buying any travel insurance, study what you already have through your existing benefits.
Any Redundant Insurance Coverage
Although the classic example is rental car insurance, there’s often a fair amount of overlap with the insurance people have. Your auto insurance covers medical bills after a car accident, but so could your health insurance. Your homeowners insurance covers liability for an injury on your property and so does an umbrella policy, which should offer enough supplementary coverage, if needed, to protect your net worth.
But don't go overboard buying insurance. Given this overlap, it’s possible that the limits on your existing policies are higher than necessary because they cover the same risk. It’s also possible that the coverage provided by even one of those policies exceeds what you truly need. Howard recently found that his homeowner’s coverage was for $100,000 more than the replacement cost of his home.
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