Many insurance offerings too specific to be a prudent buy

PERSONAL FINANCE

October 19, 2003|By EILEEN AMBROSE

IT SEEMS there's insurance to cover every risk or fear.

Worried your plane will crash? Buy flight insurance.

Afraid you won't be able to pay your bills if you lose your job? There are policies to cover credit card and mortgage payments.

If you fear cancer, you can buy insurance for that disease only.

Some insurance experts advise against such narrow policies. Often, the cost is high considering the benefit, they say. Or, the premiums are cheap because the chance of the event occurring is rare.

"For the vast majority of consumers, there only needs to be really five types of insurance to consider: life, disability, health, car and home," said Bob Hunter, director of insurance for the Consumer Federation of America.

Often, Hunter added, people are better off buying regular life insurance and good health and disability policies to meet their obligations if disaster strikes, rather than buying small pieces of insurance that may be too limited in what they cover.

Even some companies that sell these special policies don't disagree. But, they add, they are filling a demand, and these policies are sometimes the solution for consumers who can't afford more comprehensive coverage.

If you're the typical consumer, you're likely to be offered one of the following niche policies. Consumer advocates advise that you weigh the cost and benefits, and whether the policies make the best use of your insurance dollars.

Mortgage life insurance. This will pay off the mortgage if the homeowner dies, and is often pitched by the lender providing the loan, Hunter said. Some policies will cover payments for a period if the homeowner is disabled or laid off.

Hunter suggests homeowners increase their regular life insurance coverage if they worry their survivors won't be able to maintain the mortgage. It can be cheaper, plus regular life insurance would give survivors more flexibility because the proceeds could be used for any expense, not just the mortgage, he said.

For a 40-year-old male who doesn't smoke and has a $140,000 mortgage, the insurance would cost $20 a month, said Joe Perry, a vice president with Countrywide Insurance Services. The coverage declines as the mortgage is repaid, but the premium stays the same.

Perry said the insurance is an inexpensive option for those with health problems who would have to pay a lot more for regular life insurance.

Consumer credit insurance. You can buy a policy that will pay off a car loan if you die, or make payments if you become disabled or are laid off. Consumers can buy similar protection for credit cards through insurance and noninsurance products, often called debt cancellation.

Critics say the coverage is generally overpriced when comparing the amount of claims paid with premiums collected.

State law sets caps on how much insurers can charge for credit insurance. Because some credit card products aren't insurance, there are no rate limits and the price tends to be even higher and the benefits lower, said Birny Birnbaum, executive director of the Center for Economic Justice in Texas.

If consumers want credit insurance, though, they should buy it from credit unions, which tend to keep prices low, he said.

The average credit insurance policy costs $250 for five years and $10,000 worth of coverage, said William Burfeind, executive vice president of the Consumer Credit Insurance Association.

People often buy this coverage because they don't have enough savings or life insurance, yet want to make sure they take care of their debt if catastrophe strikes, Burfeind said.

Flight insurance. This covers passengers in the event of an airplane crash, not if they die of a heart attack or choke on a peanut while in flight.

Critics say the insurance is often inexpensive, but feeds on fears of flying. "The probability of dying in an air crash is probably the same as falling in a tub," Hunter said.

Besides, your estate can always sue the airlines if you die in a crash, Hunter said. "If anything, you need less insurance if you die in an air crash, not more," he said.

Travel Guard International sells flight accident insurance to cover passengers injured or killed on a commercial airline. The cost is $50 for $500,000 of coverage for a single passenger.

Spokeswoman Carol Mueller said some travelers are just more comfortable flying knowing they have the policy. Sometimes, too, travelers haven't had time to meet with an agent to buy or upgrade a regular life policy, and purchase flight insurance as a precaution, she said.

Car rental insurance. This can cost $10 or $15 a day, experts said. Before buying it, make sure your auto policy or credit card doesn't already provide rental car coverage, experts said.

Cancer insurance. Coverage for cancer or any other single disease preys on consumers' fears, and could leave them without adequate insurance if they contract some other illness, consumer advocates said.

"You need health and disability [insurance]. You don't need these little pieces," Hunter said.

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