Updated: 9/9/2010 9:00 AM ET|
7 insurance myths that could cost you
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.
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.
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