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Every day brings me another insurance offer. In today’s mail, I was invited to insure against identity theft for $34.99 a month.
Last week, I was sent a “final notice” to purchase a home warranty. In the same batch of mail, I was offered a $20,000 whole life insurance policy for $132 a month.
My most faithful correspondent is my water company. Every month it invites me to insure the water pipes under my lawn for about $1,000 a year. I would pay up to $6,000 in repairs should a pipe fail.
Lately, when I buy tickets online, a check box appears offering me coverage that would refund my purchase if I could not attend because of illness. A similar offer appears when I book a hotel room.
I’ll bet this isn’t just happening to me. You may be getting a lot of uninvited insurance offers as well. If it helps, here are a couple of rules I learned while studying for the CFP that help me decide what insurance to buy.
The first rule is to buy insurance against catastrophes that we cannot afford. Skip coverage against risks that we could pay from savings.
This means I’m not buying insurance for two tickets to the Philadelphia Flower Show. I invoke the same rule when I throw away the offer for the water line insurance and the home warranty. If something breaks around the house, I can afford to pay for the usual repairs.
I do buy health, homeowners, auto insurance and umbrella insurance policies. If something went seriously wrong in these domains, the cost could be more than I want to bear.
Life insurance falls into a gray area. A second rule can help here: Only buy life insurance when someone depends on your earnings. Following this rule, I carried term life insurance when my kids were young. Now that they are grown, I’ve dropped life insurance.
These rules aren’t absolute. Some people may buy life insurance to help settle their estate, for instance. Others may feel reassured by purchasing an extended warranty on a new car. Still, these two rules help me fend off uninvited offers that seem designed to prey on our natural anxieties.
Aggravation vs. Devastation is the contrast that Greg seems to be addressing in this thoughtful posting.
In my “day job” I typically suggest to clients that they focus their insurance dollars on protecting against devastation (e.g. Liability Umbrella, disability and life insurance for HH income protection) and opt to self-insure whenever possible against aggravation (via selecting higher home / auto insurance deductibles that correspond with their level of cash reserve funds) and generally bypass most warranties and service plan type offers.
The majority of folks I work with could recover from a $1000 out-of-pocket collision deductible after an auto accident without too much difficulty. Very few could say the same after a $1,000,000 personal injury judgement against them, or the loss of a breadwinner’s paycheck due to injury, illness or premature death.
An intentional strategy of re-deploying insurance dollars previously spent on aggravation-level exposures to instead buy protection against devastation-level events can also help to keep their total annual out-of-pocket premiums paid for all HH coverage more manageable.
Nice article Greg, and I agree. Never mind a deductible, we took off collision on our car altogether. We do carry high deductible renters insurance. On the other hand, we carry personal property insurance on a few valuable items. Our reasoning is that while we could afford to have them lost or stolen, the risk of that happening in our nomadic lifestyle is higher, so it’s worth insuring against. The math might say it isn’t, but personal finance is personal…
Just thinking, another area in which we sometimes buy “insurance” is with flight and hotel reservations. We will sometimes pay more for fully changeable/refundable tickets, or pay the higher flexible rate for accommodations. It’s not uncommon for us to change our plans.
I kept forgetting to take collision coverage off my car (2007, but only 71,000 miles). Recently I got too friendly with a column in a high rise parking deck and it probably cost the insurance company more than the car is worth for the repairs….
When I was working I carried disability insurance on top of that provided by my employer. As Rick mentioned below, a couple of years ago I wrote an article here on travel insurance: always carry medical and evacuation/repatriation, other travel insurance only if you have prepaid high expenses you can’t cancel for a refund if necessary. And don’t buy it from a tour or cruise company.
Question to Andrew Forsythe: You write that “ while the comments below describe various scenarios where some of the niche…….”At the time of writing how did you know what the comments would be?
T.V., at the time when I posted my comment, there were already numerous comments which had been posted before. The comments begin at the bottom and then chronolgically move towards the top.
In 2022 we booked a 13 night cruise to the Caribbean and I painfully paid 260.00 for travel cancellation insurance. 2 months before the trip, my S.O. came down with a back issue that left her on a walker for almost 3 months. It required us to cancel the cruise. We received great service from the Insurance company and were reimbursed for every dollar other than the 260.00 in premium. I always buy this type of insurance now when we cruise.
I am otherwise a 5000 deductible on our home, 1000 deductible on our cars, and never buy extended warranties.
Nice article, Greg. Avoiding unnecessary insurance ranks high on my list of smart frugal habits. You’re right, the solicitations are ubiquitous. Just this evening I tossed a letter offering term life to seniors. I suppose someone must bite, but I routinely decline.
Thanks for this, Greg. My thoughts on insurance are very similar to yours.
While the comments below describe scenarios where some of the niche policies make sense, especially for travel, most of the time I think they’re a bad buy.
It’s similar to why betting in Las Vegas is a bad investment strategy: the house has calculated the odds and they’re going to win more often than you do, and that’s how they make handsome profits. The sum of the premiums the niche insurance companies earn will be more than the sum of the claims they pay, which is likewise how they make a profit.
Yes indeed, if it’s a risk you can afford to take, go naked.
Good article and I agree. That said, I think it makes sense for folks to carefully review their specific situation and try to identify those times when it will make sense to buy the add on insurance. I have an example as well where I think it makes sense. In my 55+ retirement community the roads are all maintained by the county; the sewer main line for my house is in the middle of the road; each homeowner is responsible for their sewer line all the way to where it enters the main line; and only a handful (small subset) of plumbers are licensed by the county to punch through the roadway. Result: minimum cost for repairing a simple sewer line break under the roadway starts at $12K. Cost of monthly insurance — $6. Oh yeah, our road is lined with big trees on our side of the roadway and a neighbor already experienced this nightmare. So that’s one policy I gladly pay. As with so many things in life the devil is in the details and sometimes those details will turn a good “rule of thumb” on it’s head. So I also generally don’t buy the insurance, except in those special cases when I think it has value for me.
We have the utility rider on our homeowners insurance also and it is about $25/year. We think it is worth it also. Chris
Thanks for the info! I wasn’t aware of that either. Great timing since our home owner’s insurance is due next month. I sent a note to our agent to see what our cost would be for service line coverage.
Thanks, I hadn’t heard of that. I’m going to check and see if our insurance offers that option.
Beware! We had State Farm service line coverage for decades. When we sold the house, the buyer had the sewer line inspected and detected a sagging line. We had it fixed, $10k, and then submitted the invoice to State Farm. They denied the claim because the sewer line had not collapsed or backed up into the house. This is spelled out in the declarations.
We submitted a request for the local water utility to help and they paid us 50%.
State Farm is a sham organization.
Just curious about why you think an insurance policy is a scam when what the policy pays for is clearly described in writing in the policy contract? In my USAA HO policy this coverage paragraph is titled Sewer Backup and covers damage when a sewer lines backs up and floods the house. Did State Farm change the coverage language some year after you bought the policy?
Shouldn’t you have read the policy language at some point and chosen a different insurance company if you didn’t think the coverage was sufficiently broad?
How else should insurance (or any other business) operate other than by providing a written contract that spells out their obligations?
Gre, I learned the same rules during the CFP program. I have been considering a yearly travel insurance policy based on an excellent Kathy Wilhelm article from 2023. Recently, someone I know broke his leg while skiing in rural Switzerland. He had travel insurance which provided tremendous coverage, even providing a table nurse to escort him down from the mountains, and escort him back to PA. With lots of travel (some of it expensive) planned for the next 5 or more years, an annual policy is starting to seem like a good idea.
The first rule is to buy insurance against catastrophes that we cannot afford. Skip coverage against risks that we could pay from savings.
Thanks Craig, this has always been my golden rule. After my 60th birthday, I did begin buying travel insurance when we left the country to protect against the cost of medical transportation back to the US should we have an emergency.
I’ve lately been buying insurance I would never have bought before. For instance, yesterday, I booked a $760 hotel stay where there’s no refund if I need to cancel, so I paid $34 for trip-cancellation insurance. That hurt. But the fact is, over the past six months, we’ve been constantly changing our travel plans, depending on the latest twists and turns in my cancer treatment.
The upshot: While a lot of these add-on policies strike me as junk insurance where the cost is absurd and the financial risk small, occasionally — very occasionally — the policies do make sense.
Most trip interruption/cancellation policies have exclusions for pre-existing conditions. So you must be getting the version that allows for “any reason” cancellation which typically is more expensive.
Jonathan, I understand. I realize I’ve been using a life hack to obtain trip cancellation insurance at no added charge. When I reserve a hotel room, I will only book one that allows me to cancel at no charge up until a few days before my stay. I haven’t yet canceled a planned trip yet but I feel reassured to have the option.
That would have been my preference — but in this case there was only one hotel to choose from!
My spouse has legal responsibility for her mother’s health care. Ro is in an Alzheimer care facility and the final stages of life. G takes an airline trip about every three months. She prefers to purchase refundable air tickets because of the uncertainty about these trips. I’m not sure it makes economic sense. G is somewhat stressed out by this responsibility and family pressures so I see it as good for her mental health.
For decades, my wife and I always booked the cheapest, non-refundable fares without insurance. In retirement, we are frequently booking with either friends or our adult family. When traveling with others, we now almost always pay for refundable fares or cancellation insurance. Just this morning our son called about his boss suggesting he potentially attend a conflict to our long-booked family vacation.
Yes, the high likelihood of your having to cancel makes total sense.