10 kinds of insurance you (probably) don't need

By Dan Phelps

1. Private mortgage insurance. When you buy a house, the mortgage company wants to make sure it won't be hurt too badly if you skip town without paying off the loan. Unless you can put down at least 20% of the home's value, you're usually required to get PMI. The policy's purpose is mainly to secure the lender's investment, but people are using it to buy a home with a much smaller down payment.

More are opting for PMI after a rash of stories about adjustable-rate loans ballooning into unmanageable payments: Applications were up 56% from February to March 2007, according to industry trade group Mortgage Insurance Companies of America. Eleven percent of new loans included PMI in the first quarter of the year, a number that's expected to rise.

But you'll pay for it in the long run. Premiums can amount to as much as a 13th mortgage payment each year.

Once the outstanding balance on your mortgage drops below 80% of the original value of the home, federal law says your lender must notify you that you can cancel the insurance. If your home has appreciated rapidly, you can also apply to cancel it, but you'll probably have to pay for an appraisal ($300 to $400) to prove your point.

2. Service contracts. These "extended warranties" are usually worth skipping. A service contract is simply a promise to perform or pay for certain repairs or services. Service contracts often duplicate what's provided in the standard warranty you get with a car or an appliance. Read your regular warranty carefully. Then compare it to the service contract. Sometimes, you can purchase service contracts later, when the original warranty expires.

3. Separate policies vs. riders. Buying separate policies to cover things like boats or RVs may not be your best choice. Check out whether supplemental coverage is already available through your existing homeowners policy.

A major reason is cost. Think of it as buying in bulk. When you add a rider to an existing policy, it usually costs less than buying a whole new policy. Also, many of these "things that move" are already covered by your home insurance, albeit at less-than-ideal levels.

4. Flight insurance. According to some statisticians, you could fly on a major airline every day for 26,000 years before you'd be involved in a plane crash. Even then, the odds are that you'd survive the crash. Besides, you may already have flight insurance, if you purchased your plane ticket with a credit card. Some credit card companies give you $100,000 in coverage just for charging your ticket on their card.

5. Credit insurance. This insurance is often pushed on consumers. The most important thing to remember about credit insurance is that a lender cannot make you buy it.

There are several variations (including credit life insurance, credit health or disability insurance, and credit unemployment insurance), and they all do the same thing: They pay the lender if you can't. So why would you want to pass on credit insurance?

Well, for one reason, you might have enough life insurance, disability insurance or assets to cover your debts. Or, you might be able to buy a term life insurance policy for less, and the payout would be higher.

If a 30-year-old Oregon woman in good health takes out a five-year, $5,000 loan, credit insurance would cost $112.50, according to the Oregon Department of Consumer and Business Services. The cost of the credit insurance is added to the total loan amount, so it incurs interest. If this same woman already had a $50,000 term life insurance policy, and tacked on an additional $5,000 to cover the loan, it would add less than $15 to what she already pays for the life insurance policy over the five-year loan period.

Even if she buys a new term life policy, it would cost her about $500 for five years of at least $50,000 in coverage (that's usually the minimum coverage available) -- 10 times the coverage of credit insurance for about four times the cost. And remember, the credit insurance policy would pay the lender only whatever is owed.

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