Insurance companies are very good at making you feel like you’ll be ruined without coverage for every conceivable scenario. Some of that coverage is worthwhile. Some of it is expensive peace of mind that statistically almost never pays out. Here are five types of insurance that drain money from a lot of people’s budgets without providing much real value.
1. Extended warranties on electronics
That $150 extended warranty on your $800 laptop is a bet you’re making against yourself, and the house almost always wins. Extended warranties (also called protection plans or service contracts) are among the most profitable products retailers sell. The markup is enormous because most electronics either fail within the manufacturer’s warranty period or last well beyond the extended one.
The numbers tell the story. Consumer Reports found that about 5% to 8% of products covered by extended warranties needed repair during the extended warranty period. The average repair cost was less than the warranty price. Put differently, you’re paying $150 for a roughly 5% chance of a repair that might cost $100 to $200.
Better approach: put the money you’d spend on warranties into a small “self-insurance” savings fund. Over time, you’ll save more than you’d ever spend on repairs, and the money is yours to use however you want.
2. Credit card payment protection insurance
Credit card payment protection (also called credit card insurance or debt cancellation coverage) promises to cover your minimum payments if you lose your job, become disabled, or die. The cost is usually around $0.85 to $1.35 per $100 of your monthly balance.
On a $5,000 balance, that’s roughly $42 to $67 per month, or $500 to $800 per year. For that price, the coverage typically only pays your minimum payment (not your full balance) for a limited number of months. And the definitions of qualifying events are narrow enough that many claims get denied.
If you’re worried about job loss, a properly funded emergency fund handles the same risk without monthly premiums. If you’re worried about disability or death, separate disability insurance and life insurance provide broader, more reliable coverage.
3. Rental car collision damage waiver at the counter
When you rent a car, the agent offers a collision damage waiver (CDW) or loss damage waiver (LDW) for $15 to $35 per day. On a week-long rental, that’s $105 to $245 extra. This “coverage” (technically a waiver, not insurance) means the rental company won’t charge you for damage to the car.
Here’s what many people don’t realize: you likely already have this coverage from two other sources. First, your personal auto insurance policy usually extends to rental cars. Check your declarations page or call your insurer. Second, many credit cards provide rental car damage coverage as a built-in benefit when you pay for the rental with that card. Chase Sapphire, Capital One Venture, and American Express cards are among those offering this.
Before declining at the counter, verify your personal auto policy covers rentals and check your credit card benefits. If both apply, the rental counter CDW is redundant coverage at a premium price.
4. Accidental death and dismemberment (AD&D) insurance
AD&D insurance pays out only if you die or lose a limb in an accident. Not from illness, not from natural causes, and not from suicide. Just accidents. And “accident” is defined narrowly in most policies.
The premiums are low ($5 to $15 per month for $100,000 to $250,000 in coverage), which makes it feel like a bargain. But the low premiums reflect the low probability of the insurer ever paying a claim. The vast majority of deaths are from illness, not accidents. Heart disease and cancer alone account for more than 40% of deaths in the US. Accidents account for about 6%.
If you need life insurance, buy actual life insurance that pays regardless of how you die. Term life costs only slightly more than AD&D per month and covers everything, not just the unlikely scenarios.
5. Identity theft insurance
Identity theft insurance typically costs $5 to $25 per month and covers expenses related to restoring your identity after fraud: legal fees, lost wages from time off work, and costs of reissuing documents. Most policies cap coverage at $25,000 to $1 million.
The problem: the insurance doesn’t prevent identity theft. It only partially covers cleanup costs after it happens. And most of those cleanup costs can be handled for free:
- The FTC provides a free identity theft recovery plan at IdentityTheft.gov
- Credit bureaus let you freeze and unfreeze your credit for free
- Banks and credit card companies have fraud departments that reverse unauthorized charges at no cost
- Many credit cards and bank accounts already include identity theft monitoring as a free perk
If your credit card already provides free credit monitoring and you can freeze your credit for free, the insurance policy is paying for something you can get without a premium.
Insurance that is worth paying for
To be clear, not all insurance is a waste. Health insurance, auto liability insurance, homeowner’s/renter’s insurance, disability insurance, and adequate life insurance (term, usually) protect against financial catastrophes you genuinely can’t absorb out of pocket. The distinction is between insuring against events that would bankrupt you (worth it) and insuring against events that would merely annoy you (usually not worth it).
The rule of thumb: insure against catastrophic losses you can’t afford to cover yourself. Self-insure against small, manageable losses by keeping an emergency fund. Anything in between deserves a hard look at the actual probability of a claim and the cost-to-benefit ratio before you sign up.