"Protection" Rejection
Say No to Small Insurance Plans Disguised as "Protection Plans"

It would be nice to live a life without disappointment. But few of us can afford it.

Of course, that hasn't stopped corporate America from trying to sell us such a life — one extended warranty at a time. Most of us have had this experience: As we buy a new TV for say, $500, we are offered a $100 "protection plan" that will cover almost any repair for three, four even five, years. And it's tempting. After all who wants to buy a TV only to have it break within a year?

That would be disappointing. But it doesn't mean we should shell out money for what is essentially an insurance policy protecting us from that disappointment. For one thing, it's very unlikely you'll use this protection plan. Once you get the TV home and it works the first day, it will likely keep working well beyond the few years of an extended warranty. Consider your own life. When was the last time a repair person was in your home to work on any of these items: TV, stereo, DVD player, computer, refrigerator, dishwasher, stove, microwave, toaster oven, coffee maker, gas grill, washer, dryer and answering machine. Unless you're extremely unlucky, you probably haven't had a problem with more than two of such items within the first four years of purchase. But purchasing extended warranties for all these items (they all come with the option) would be extremely expensive and wasteful.

Proper money management includes buying enough insurance to protect you from financial ruin, but also avoiding over-insuring your life. For all insurance, a good rule of thumb is: Only buy coverage for losses you couldn't possibly afford to cover if you had to. These "protection plans" definitely fall into the "over insurance" category. Here are a few often overlooked examples:

Inside wiring maintenance plan on your home phone: If you have a landline phone, look at the bill and see if you have an item with this name, or something similar. It's usually about seven dollars a month. With this plan, the phone company usually won't charge you if they have to fix wiring problems inside your home. (They'll almost never charge you to fix something outside your home, with or without this plan.) It might sound reasonable enough, but now ask yourself when the last time was that the phone company fixed a wiring issue inside your home. Seven dollars a month is $84 per year, or $840 every ten years. Call the phone company and cancel this plan. When they try to discourage you by reminding you that you'll have to pay for any uncovered repairs, thank them for their concern and tell them you'll keep your $840 and gladly pay for the $100 repair if the need arises someday.

Cell phone insurance: At about $5 per month, it's the same story. If by chance you have to replace your phone before your carrier offers you a new phone anyway, you could easily do so with all the money you save over the years by keeping your $60 a year, whether or not your phone breaks or is lost or stolen.

Travel insurance: When purchasing a non-refundable airline ticket, this can be especially tempting. You book a $200 ticket online and just before completing your purchase, the airline asks you if you would like to "protect" yourself with trip cancellation insurance for "only" $15 or so. But if you read the fine print, you'll realize that some of the benefits aren't so easy to, well, benefit from. For example, if you're too sick to travel, you'll need to complete some paperwork and provide a note from a doctor. What if you're sick, but not sick enough that you would normally go to a doctor? You'll have to decide if it's worth the time and expense of going to a doctor to get your note. And remember, the odds are low that you will get sick at all and high that you will have simply wasted your $15. Reject travel insurance.

Credit protector plans on your credit card: These plans promise to make your minimum monthly credit card payments if certain events occur, such as an illness that keeps you out of work — in exchange for a fee, of course (which varies based on your monthly charges). As a Debt Matters reader, you probably already know one problem with that: The idea is to pay the whole balance, not the minimum payment, if you carry a credit card at all. But if you did want to only pay the minimum, you could manage to do so with or without their "protection."

Companies offer these quasi-insurance plans because they make a lot of money by selling them. They know most people will never cash in on the benefits. Instead, keep your money and use it to build your emergency fund for unanticipated expenses. Over time, you will have more than enough money to cover the very occasional expense that the plans might have addressed, and the rest of the money will be yours to keep.