Advice From an Insurance Expert: 10 Types of Coverage You Should Never Buy

While it’s important to have certain types of insurance, there are some coverage you can do without. For instance, you may be legally required to have health insurance, car insurance or workers compensation, but other types of coverage, like home insurance, are must-haves even if they are not required. Here are the types of coverage you simply don’t need under certain circumstances and those you must buy.

Key Takeaways Some types of insurance coverage are just a waste of money, depending on your needs. Some insurance coverages are required by law. Some insurance coverages are not required by law but are must-haves.

Insurance Coverages You Just Don’t Need

1. Gap Coverage From a Car Dealership

While gap coverage is an important coverage to have, if you have a car loan that is more than the value of the car. New cars depreciate significantly as soon as you drive off the lot and even more over time. It’s important to determine what your car is worth by checking Kelley Blue Book or Edmunds to see what that value is.

The car dealership will try to sell you gap coverage. Even if you need it, it’s a bad idea to buy it from the dealer. Dealerships are notorious for high prices for gap coverage and they lump it into car payments so keep your ears perked and make sure you buy this coverage from an insurance company instead.

Note that gap coverage is only available on newer cars. Buying a car that is more expensive than its average price will mean that if your car is stolen or totaled, you may not get fully paid out for the remaining balance of the loan.

2. Rental Car Insurance

If you have collision coverage on your car, it’s totally gratuitous to buy a collision waiver when you rent a car because your personal car insurance coverages will apply to the rented car as well. As inexpensive as the insurance waiver is at the rental car kiosk, you’re just paying for something you already have.

If you do not have collision coverage, the credit card you’re using to rent the car may offer insurance coverage. Call your credit card company ahead to be sure.

If you want to be covered for rental cars used while a car is in a repair shop after an accident, you can buy rental car reimbursement coverage.

3. Full Coverage on an Old Car

Full coverage means that you have collision and comprehensive coverage. You’ll never get more money from your insurance than what a car is worth, if your car is totaled or stolen, so, when you consider how much you pay in premiums on collision and comprehensive, you may want to consider dropping those coverages. The general rule of thumb is to drop the coverage, if your car is worth less than $4,000. Your liability coverage pays for damages to the other car, if you’re responsible for an accident.

4. HO-1 Homeowners Insurance Policy

Some insurers don’t even offer an HO-1 home insurance policy, which only protects against 10 perils. An HO-2 policy offers more coverage and is usually the lowest level of coverage an insurer will offer, while most Americans buy an HO-3 policy which is more comprehensive.

The 10 perils covered by an HO-1 policy are:

1. Fire and lightning
2. Windstorms and hail
3. Explosion
4. Riot or civil commotion
5. Damage by aircraft
6. Damage by vehicle
7. Vandalism
8. Smoke
9. Theft
10. Volcanic eruptions

Now, take a look at what’s not covered:

1. Falling objects
2. Weight of ice, sleet or snow
3. Accidental discharge or overflow of water/steam from appliances, heating or air conditioning systems
4. Accidental tears, bulges, cracks and burns of HVAC or hot water systems or water heating appliances
5. Freezing of plumbing, heating, air conditioning and fire sprinkler systems
6. Accidental damage from power surges

5. Personal Auto Insurance for a Work Vehicle

If it’s discovered that you were using the vehicle you were driving for a work-related activity, other than a usual commute, you may not be covered by your personal auto insurance policy. Certain professions, like real estate agents, and others who use their vehicles for business need a commercial auto policy. If you’re unsure if you need one, speak with your agent about your line of work.

6. A Catastrophic Health Insurance Policy

If you have any chronic condition, a catastrophic health insurance policy is not the policy for you. You may as well spend a little more and get a comprehensive traditional health plan. You may even be eligible for a subsidized one that costs as little as $40 a month, depending on your income.

Your health should be your most important priority. Trim the fat from your other expenses and buy a high deductible plan at the very least. A catastrophic health policy will not cover an emergency until you’ve paid the very high deductible anyway.

7. Term Life Insurance for Infants

It’s one thing to buy a whole policy that may accumulate enough money for at least part of a college tuition by the time a baby turns 17 or 18, but a term life policy will not have a cash value that can be cashed out. It only covers a set period of time and only pays out the beneficiary upon the death of the policyholder.

8. Private Mortgage Insurance

It’ll cost you so much more money if you have to buy private mortgage insurance (PMI) than it would if you saved the 20% you need to put down on a home with a conventional loan. PMI can cost as much as $1,000 a month for every $100,000 that you borrow.

You also cannot pass the house down to an heir until the PMI is eligible for cancellation (20% of the mortgage must be paid off). Also, contrary to what people think, PMI does not pay off a mortgage after the mortgage owner dies. For that you’d want mortgage protection insurance.

9. Water Line Insurance

Your local water supplier may contact you to pay a couple or a few hundred dollars a year to insure the water main that runs to your house. Many people are taken by surprise when they receive correspondence about it, and some even buy the water line insurance without doing a little research about what it is and if it’s necessary.

Replacing a water line costs roughly $4,000 but the chances of experiencing a problem with a water line is very rare. Water mains tend to last a long time — typically 50 years or more. However, a home insurance policy will never cover pipes outside of the home.

A water line policy typically covers the water line from the edge of your property to the outside wall of your house.

10. Disease-Specific Insurance

Instead of spending money on supplemental policies, like cancer insurance, it makes more sense to buy a more robust traditional health plan, because you may never need the disease-specific coverage.

You also can’t buy cancer insurance, for example, after you’ve been diagnosed, unless it’s offered as a group coverage through your employer. Taking preemptive steps by thoroughly using your primary health insurance coverage for screenings makes more sense than spending extra money on coverage you will hopefully never need.

If you are at high-risk of getting cancer, it may be worthwhile to buy cancer insurance as a supplemental coverage, not as a replacement for traditional health insurance.

Insurance Coverages You Simply Can’t Go Without

1. Liability Car Insurance

There’s a reason why liability car insurance is required by law. You don’t want to pay for a car accident, especially if there are injuries. Keep in mind, however, that liability coverage only covers the other driver and their passengers, if you are at fault. Your car will only be covered with collision coverage, which is not required by law, only lenders if you are financing or leasing the vehicle.

2. Health Insurance

Medical bankruptcies occur to thousands of Americans each year because they are uninsured and they suddenly fall ill or suffer severe injuries in an accident. Medical bills are expensive, and even the healthiest individual may contract an illness or need medical care after being injured. A hospital stay alone can cost thousands of dollars. Even if there is no penalty for being uninsured in your state, it’s a good idea to buy a health insurance policy.

3. Medicare

Even if you’re working, it’s a good idea to get Medicare instead of buying an employer-sponsored plan. Part A is free while Medicare Part B has a monthly premium that costs $174.70 to $594.00, depending on income. However, enrolling in Part A impacts your health savings account (HSA) if you have one.

There are two situations in which you  must get Part B when you turn 65 or else you’ll incur a fine:

1. If your employer has fewer than 20 employees.
2. If you’re covered by a spouse’s employer, and the employer requires you to enroll in Medicare when you turn 65.
3. If you’re unmarried but living in a domestic partnership and are covered by your partner’s employer health insurance.

If you’re worried about dental and vision coverage, you can buy a Medicare Advantage plan instead. You’ll get hearing covering on top of everything.

4. Homeowners Insurance

While it’s not required by law to have homeowners insurance, if a disaster strikes and you need to rebuild your home, you’ll be happy you have it. If you have a mortgage, your lender will require you to have a home insurance policy, but for some condos, it may not be required. It’s a good idea to buy anyway: An HOA will never help pay for damages you cause, such as if your water heater suddenly burst and flooded another unit.

You’ll also be covered for items that are stolen while away from home.

5. Renters Insurance

In many cases renters insurance is required but when it’s not, it’s a good idea to have it. Not only will it cover your belongings at home, but you’ll be covered for personal items that are stolen out of your car or if your bike gets stolen after locking it up.

6. Final Expenses Coverage

Even the most modest cremation will cost a lot, and a burial will cost much more. Funerals are expensive too. The last thing you want to do upon passing is cause your loved ones to go into debt paying for saying farewell properly.

7. Workers Compensation

Workers compensation is required by law, even if you only have one employee. If you do not and that employee gets sick or injured while working, you will have to pay for all medical bills out of pocket, and your general liability coverage will not cover it.