Monday, December 7, 2015

Insurance that You Don't Need

Insurance are important for our financial health and insurance that we should have are Health insurance, auto insurance, property and casualty insurance and life insurance. Some of them are mandatory and some are not, but in most cases they are. However, there are types of insurance that are not actually needed which is listed as "junk" insurance by the nonprofit consumer watchdog group Consumer Federation of America.

Here are some types of insurance that they considered junk:

Down payment insurance  

This is a new insurance product that will be on the market in January 2016. This insurance is designed to protect the down payment on your home if the real-estate market go under again.

ValueInsured, which is based in Dallas named this kind of insurance as +Plus. This is not for speculative buyers since the owner will need to live in the home and he/she cannot make a claim on the the insurance for 2 years, while it lapses after 7 years.

However, this type of insurance is for debtors who might have to move suddenly for a job, like military families, or move into marginal markets that are particularly volatile, such as Stockton, California which was hit by the worst price cut during the real estate crash with home values cut by half as a result of widespread foreclosures.

According to ValueInsured, about 8 million debtors still owe more than what their house is worth, compared with more than 15 million during the worst part of the real estate crash in 2012.

The price of this insurance is about $840 for a $20,000 down payment, and it will protect a down payment of up to $200,000 for a higher premium price. However, the policy will only activate if the market along with the value of your individual home falls 10% or more, as determined by the Federal Housing Finance Agency’s House Price Index, and then you only get back either the amount of equity you lost, or the actual down payment, up to $200,000.

Joe Melendez ValueInsured chief executive said that the aim of this product is to promote the housing market to millennials, renters and parents by attempting to ensure that their down payment is protected. This product is not for everyone. If you’re buying a home that you will live in for 30 years, don’t buy this product.

Debt cancellation or debt suspension agreements

A study published by says that 37% of Americans have credit card debt greater than or equal to their emergency savings, meaning a steep medical bill, a car accident or other unexpected expense could push them over a budgetary cliff. Some credit card companies are offering insurance against being unable to come up with monthly payments.

This insurance that are offered by credit card companies is designed to pay your minimum balance for a period of time if you lose your job or are incapacitated or unable to work, either in the form of Debt Cancellation Contracts (DCC) or Debt Suspension Agreements (DSA). Other instances where the credit card companies can either cancel or suspend your monthly payment include divorce, military deployment or a natural disaster. If you die, the credit card company may pay off your entire balance, with other companies offering only up to a certain balance, such as $10,000.

The credit card companies say this helps protect a consumer’s FICO score, which otherwise would drop if the cardholder can't pay their dues.  While some credit card companies charged a flat fee of $19.99 a month for insurance coverage, others charged between 85 cents and $1.35 per every $100 of the outstanding balance and a national median fee of 89 cents per each $100 in the balance.

The GAO report noted that of the $2.4 billion collected in 2009, just $513 million went to consumers, while $1.3 billion went into the pocket of the credit card companies in the form of earnings once reserves of $574 million were set up.

Clearly these credit card insurances is a bad deal for consumers since if you lose your job you can apply for unemployment benefits immediately.

Home warranty insurance

This insurance covers existing appliances, regardless of age, make or model that are already in the house not just those newly purchased or replaced. Some insurance companies promise total coverage of all appliances and components in the house, like air condiotner, hot water heater, or a furnace for as little as $59 a month. However, most of this plan have deductibles like many other insurance products about $75 to $125 for those offered by American Home Shield. And the repairman that will do the work will get the minimum amount of work since the insurance company wants to limit the costs. Repairman ussually accept this kind of calls when things are slow.

Child insurance

Insurance plan like the Gerber Grow Up Plan and the Gerber Life College Plan are purchased by parents and grandparents when the baby is born and the premiums are really low while the cash value benefits are guaranteed.

The Gerber Life College Plan (endowment insurance policy) will give the policy holder a lump-sum payment at the end of the term which is about 18 to 21 years. It can be used for college, or used to fund an adult insurance coverage plan as long as premiums are getting paid. The company said its advantage is that the life coverage can continue automatically into adulthood without fear of cancellation. However distributions from the endowment insurance policies are often taxed, unlike the distributions of a 529 college savings plan or an education savings account.

Body parts

Most athletes and celebrities do this, they insured body parts, J. Lo insured her butt for $27 Million, Julia Roberts insured her smile for $30 Million, retired Pittsburgh Steelers safety Troy Polamalu insured his flowing locks for $1 million, and Holly Madison insured her breasts for $1 million.

These policies are just designed to be get attention by the celebrities’ publicists, so unless you’re a celebrity or an athlete or their agent you can safely pass on this one.


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