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Related topics: insurance, auto insurance, health insurance, life insurance, Liz Weston

Insurance can be complicated, expensive and really, really annoying. The typical household pays thousands of dollars for various policies without getting much in return for that money, other than peace of mind.

Which is exactly the way it should be. Most insurance is designed to protect you against catastrophic expenses you couldn't otherwise handle. If your insurance is paying out, that usually means something really bad has happened: Your car has been totaled, your house has burned down or you have died.

The idea that you'd buy something you didn't want to use is counterintuitive, but that's the nature of insurance. Anything that's so baffling and irritating is bound to spawn myths, as people try (often unsuccessfully) to comprehend how it's supposed to work. Don't fall for any of the following:

1. 'I don't need life insurance; my spouse will remarry'

I'm delighted you think your spouse is such a catch that he or she could so easily replace you (even while trailing two kids and 20 extra pounds added while in mourning). But do you really want the economic future of your loved one(s) to depend on whom your partner can snag next?

Image: Liz Weston

Liz Weston

That's not to say that every couple needs life insurance. If you don't have minor children and your partner could pay the bills (including the mortgage) without your income, then you may not need life insurance, or you may be fine with the basic coverage provided by many workplaces (which often equals your salary or $50,000, whichever is less).

But if you have kids or anyone else who is financially dependent on you, you need life insurance -- and probably a lot more than your workplace provides. MSN Money's Life Insurance Needs Estimator can help you figure out how much to buy, and you can get quotes from websites such as AccuQuote and Insure.com. Get it done. You don't want your family's final and lasting memory to be how you left them in the lurch.

2. 'Rental car insurance is a rip-off'

Yes, the optional insurance offered at the counter is a huge profit center for rental car companies. And yes, some rental outfits are so obnoxious about pushing the coverage that you may be tempted to blow off their hard sell. But sometimes the smart choice is to buy at least some of the coverage you're offered.

Here's what you need to know:

Your auto insurance coverage may have holes. The coverage on your personal auto policy typically transfers to rental cars. If you dropped comprehensive and collision coverage on your older vehicle, you typically won't have it on your rental, either, which would leave you on the hook if the car was damaged or stolen.

Also, your coverage may not extend to rentals in other countries or rentals lasting more than a certain period (such as 30 days). You may not be fully covered if your personal vehicle is worth less than the rental. You should call your auto insurer to confirm the type of coverage you have, how much you have and what restrictions may apply to rentals.

Credit card coverage varies considerably. If you pay for the rental with a credit card and decline the rental company's collision coverage, many credit cards promise to pay whatever your primary insurance doesn't, such as your deductible if you get into an accident. (Visa and Diners Club cover all cardholders, while MasterCard, Discover and American Express offer it only on their higher-end cards, according to CreditCards.com.)

But there may be limits and exceptions to your coverage; in many cases, for example, you may not be covered if you rent a luxury car, SUV or pickup. You could invalidate your coverage if you're caught speeding or driving recklessly, while drunk or on unpaved roads. If you plan to rely on your card coverage, ask your card issuer to send you a summary of the coverage in writing and read it so you understand the details.

"Loss of use" fees are a big issue. If you wreck your rental, the company may bill you for the money it supposedly loses while the car is being repaired or replaced, along with "administrative" charges and "diminution of value" fees. You don't want to be on the hook for these charges, which can total hundreds of dollars, so check to see if your insurance or your credit card covers them. Even then, you may still face a tussle, because credit card companies often balk at paying these fees, said Michelle Crouch, who investigated credit card coverage for CreditCards.com.

"The credit card companies say, 'We'll pay it, but we want to see the rental car company's fleet utilization log'" to prove there were no cars available to replace the damaged one, Crouch said. "But a lot of times the rental car company won't provide that log, because they say it's proprietary."

Judging from her research and response to the column, Crouch said Visa had the best reputation for covering these fees. Discover doesn't cover them at all. With other cards, the bigger the stink cardholders made, the more likely they were to get some concessions, she said.

"Most of the ones who really made a fuss about it ended up at least getting some of the fees waived," Crouch said.

If you don't want the fight, aren't covered for loss of use or your coverage has other gaps, you should at least consider buying the rental car company's coverage, usually called "loss damage waiver" or "collision damage waiver." (Don't just buy everything that's offered, though. Coverage for personal effects, illness and extra liability protection often duplicates what you already have.)

Or you could change the card you use. Diners Club offers no-cost primary insurance to all cardholders, meaning that you don't have to use your auto coverage first or even notify your insurer that there's been an incident (which could protect you from a premium increase). You can get the same type of coverage from American Express by enrolling in its Premium Car Rental Protection, which costs a flat $24.95 each time you rent a car.

If you're relying on credit cards to cover you, make sure you use them correctly. You must make the reservation and pay for the car in full with the card that provides the protection, and identify on the contract everyone who will be driving the car.

3. 'The color of my car affects my premium'

This stems from the urban legends that contend:

  • Red cars garner more speeding tickets.
  • Certain colors (usually white, silver or yellow) are easier to see and get into fewer accidents.

There's no evidence to support the idea that red cars get more tickets. And the evidence on car color and safety is mixed. One New Zealand study found a lower injury rate among people in silver cars, but a contradicting Australian study (.pdf file) found silver and gray to be riskier colors than white. In a white paper (.pdf file) on car color and safety, the AAA Foundation for Traffic Safety concluded that "there is presently no scientific evidence supporting the selection of one particular vehicle color as the unambiguous best choice for safety."

In any case, insurers don't ask about your car's color, said Loretta Worters, a spokeswoman for the Insurance Information Institute. What insurers really care about, and what affects your premiums, includes:

  • Your driving record.
  • Where you live.
  • Your credit history.
  • What kind of car you drive.
  • How many miles you drive.

4. 'I'm in good shape, so I don't need health insurance'

You may be young and strapping, but you're not invincible. A single accident or illness could trigger six-digit medical bills and force you into bankruptcy. (Doubt it? A broken arm could easily cost you $10,000 or more.)

Plus, you're putting your good health at risk, because people without insurance are less likely to get routine and preventive care. "Consequently, uninsured patients are diagnosed in later stages of diseases, including cancer, and die earlier than those with insurance," the Kaiser Commission noted (.pdf file). If you do get sick or get in an accident, the quality of the care you receive will likely be worse than if you had insurance, and your risk of death is greater, the commission found.

Employer-provided health insurance is often the best deal, because typically most of the premium is subsidized by your company. You also can investigate buying an individual policy, since your good health likely will qualify you for better-than-average rates.

If you really want to keep costs down, you can look for a high-deductible policy, which requires you to pay most expenses out of pocket but that kicks in if you face catastrophic expenses. If you're under 26, your parents can put or keep you on their policy.

5. 'Whole-life insurance is a better buy than term'

Term insurance is designed to cover you for a specific period, ranging from one to 30 years. Cash-value policies, which include whole life and universal life, are meant to be carried for life and have an investment component in addition to the death benefit.

Advocates for cash-value insurance can trot out all kinds of scenarios showing how richly you can profit from this investment component. But premiums for cash-value insurance are much higher than those for term insurance -- as much as 10 times higher.

That makes the debate irrelevant for many, if not most, people. If you need life insurance, it's important that you buy enough. If it's so expensive that you skimp on coverage, your family could end up paying the price.

If you're still tempted to buy a cash-value policy, run it by an unbiased source, such as a fee-only financial planner.

6. 'Insurance buys me a new car if mine is stolen or totaled'

If something bad happens to your ride, your insurer would cut you a check for your vehicle's current market value. That's a heck of a lot less than what a comparable new car would cost and may not even cover what you owe.

You can get some idea of what your car is worth by entering its details into the used-car appraisal calculators of Edmunds.com or Kelley Blue Book. The check you'd get is likely somewhere between the car's trade-in value and what a dealer would charge retail.

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If you owe more on your car than it's worth and you don't have the cash on hand to pay the lender the difference, you should consider buying gap insurance to cover the difference.

7. 'The government covers disaster claims'

Counting on the government to ride to your rescue is seldom a good idea. In the case of disasters -- floods, hurricanes, tornadoes, earthquakes -- you may get little, if any, real help from Uncle Sam.

Most government disaster relief comes in the form of small grants (less than $5,000) or loans from the Small Business Administration, and the loans have to be paid back. To get that relief, your home has to be in a declared disaster area. If the disaster wasn't widespread, you might not get that designation.

If you don't have any equity in your home and you're prepared to walk away from any mortgage you have, then going bare can make sense. Otherwise, you should at least consider getting disaster coverage to supplement your homeowners insurance, which doesn't cover floods or earthquakes and may restrict coverage for wind damage.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.