Two Types of Insurance You Probably Don’t Need

Insurance is, for the most part, a beneficial product that meets a real need.   The need for Auto, Home, Health, and Life insurance isn’t in dispute.  Similarly, in the commercial world, corporate liability insurance is a no-brainer.  However, that doesn’t mean that every type of insurance makes sense.   There’s two types in particular that can be a good idea in some specific situations, but are, for the most part, an unneeded expense.

Although they aren’t related, the acronyms for the two are remarkably similar: PMI and PPI.   PMI stands for “Private Mortgage Insurance” and is basically a risk reduction product for mortgages.  PPI claims to be a product that protects borrowers by making their payments on a loan should they become ill, unemployed, or otherwise unable to meet their financial obligations.

About Private Mortgage Insurance (PMI)

The basic purpose of PMI is to allow a buyer to purchase a more expensive home than they normally would be able to afford.  If the down payment you’re making on a home is less than 20% of it’s appraised value or sale price, the lender will ask you to obtain private mortgage insurance. This insurance isn’t really meant to protect you, however. It’s meant to protect the lender against a situation where you default on the loan while, at the same time, the home’s value drops.   When you put less than 20% down on the loan, there’s a very real possibility, that without PMI, the bank would end up owning a home that’s less than the amount of the foreclosed loan.

PMI didn’t sound like a terrible idea during the long period of time when house values were consistently on the rise.  You paid your 10%, paid the PMI, and as the home rose in value, you were able to drop the the PMI.   However, these days, it’s much wiser to make that bigger down payment and have some equity.   Additionally, even if you need to put less than 20% down, there are strategies that have an overall lower cost than PMI.   While PMI charges vary, a typical charge is equivalent to about 1/2 of 1 percent of the loan, and the cost is NOT tax deductible.   A better strategy is to take out the first loan for 80% of the home’s cost, then put the 10% on a second loan, and finally, cover the last 10% with a real down payment.   That second mortgage payment IS tax deductible, and if you pay it off quickly, won’t cost anywhere near what PMI does.

How about PPI?

PPI, or Payment Protection Insurance, is somewhat similar to PMI in that it’s insurance that’s tied to the creation of a loan.  Up until a few years ago, this product was very popular in the UK, and all types of loans from auto finance agreements, credit cards, and home loans had PPI policies available.   The basic premise of PPI is that it will cover your loan payments, for a set period of time, should you become unable to work due to illness or loss of your job.  To be fair, some of these policies were reasonably priced, legitimate policies from reputable companies.  However, the vast majority of the policies were sold in a manner that was very unfriendly to consumers.   Millions of UK borrowers were mislead about the cost of these policies, the hidden exclusions, and sometimes even the fact that they had purchased it.    It turned into a huge scandal, culminating in a government-led court case that will cost UK lenders, including some large and notable banks, BILLIONS of UK pounds.

There are good reasons, however, to pass on well-priced and legitimate PPI policy.   If your main goal is to be able to cover loan payments if you suffer a job loss, you may already be covered by your employer’s sick pay, disability, or workman’s compensation program.   Unless your debt load is unusually high, if you have good coverage from your employer, the PPI premiums aren’t buying you much.   PPI policies also typically come with significant exclusions for situations like being fired for cause, as well as exclusions for some types of medical conditions, like chronic back pain.   If you absolutely think you need PPI, you should at least shop around.   Most people that bought this type of insurance purchased it directly from the originator of the loan.   That’s convenient, of course, but probably not a buying tactic that will net you the lowest costs.

Our advice is to be careful when you are buying anything that looks like “specialty” insurance.   This applies in other common situations as well.  For example, when renting a vehicle, you will be offered something called a “Collision Damage Waiver”, or CDW.   This is just insurance under another name, and may overlap with insurance offer by the the issuer of the credit card you use to rent the car.   Or, in many cases, it’s covered by your primary auto insurance.  Avoid overlaps of coverage, and you may save a little money.

 

 



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