Sneaky Insurance Scams

Very few people really understand the financial implications of insurance. I even include insurance agents in my generalization. I am not saying that they lack knowledge of their products, because that would be ridiculous. Of course they can tell you what happens if you don’t have comprehensive coverage and your car gets damaged in a hail storm; and they can look a daddy in the eye and encourage him to get lots of life insurance so he can provide for his children if he is suddenly wiped out; but, certain people should have neither of those policies, even if they drive a luxury car and have several children.

In my upcoming book, Stop Flushing Your Money Down the Drain, insurance is one of a dozen major categories we discuss. I understand that most of us would rather watch reruns of the Simpsons than have an in-depth discussion about (yawn!) insurance, but it is that very attitude that leads us to flush HUNDREDS OF THOUSANDS OF DOLLARS DOWN THE DRAIN over our life time (see article about compound interest),

In a future article we will discuss the major insurance matters such as home-owners, auto, life and health insurance, but for today I want to discuss some of the “sneaky insurance”.

To begin, insurance companies and other businesses have figured out that the average person does not like the word “Insurance” so they have devised some aliases or nick-names for their products. Have you ever heard of “Protection Services” or "Replacement Plans" or “Extended Warranty?” These are all code-words for insurance.

Here is one of the clever programs: There is a strong likelihood that when you obtained your last credit card, the bank immediately sent an “Insurance Agent” after you. The nice person on the phone let you know that “as a favor to new customers” the bank was giving away a 90-day FREE service. The friendly caller went on to explain that if you should become suddenly ill or lose your job, the bank was willing to forgive your credit card payments until you get back on your feet - for up to one full year.

After the 90-day trial period, the service would continue at a cost of “just pennies per day”. For a mere ninety-seven cents per one-hundred dollars of your unpaid credit card balance, you could sleep well knowing that the bank is “watching your back”…another code word.

The caller continues, “So all I need to GIVE you this FREE service is to verify your address. Do you still live at …?” If you hesitate or resist, the caller says, “Naturally, you can change your mind at any time.” WOW! What a great bank!!! Sounds great, right? Who could resist such a great deal?

Well, common sense tells us there must be a catch, and there usually is. There is a lot more to this “free” offer. Before we go on, ask yourself why a bank would be so nice to you. I bet you have figured it out. The bank’s cleverly designed program is counting on the fact that the monthly fee will kick in without you noticing it. Card Ratings tells us that customers pay six-billion dollars per year for this service.

The first 90 days goes smoothly. Then you start using your card a little more and you might even carry an average balance of around $4,000 (The national average is twice that amount). You probably don’t scrutinize your statement that closely and even if you do, you may have even forgotten what it is or you just don’t want the aggravation of dealing with it.

Someday, if you ever do lose your job or take ill, there is a good chance you will forget you have the service anyway, and never collect a dime. And, even if you do file a claim, all they pay is the minimum payment. They do not pay off your balance. In the mean time, $40.00 per month comes out of your account, forever and you get little or nothing out of it. Geoff Williams of WalletPop points out it can even be higher than that.

Therefore, my recommendation is to just say, “No thank you” when somebody offers you FREE credit card insurance, regardless of what the bank calls it, unless you have some reason to believe that you are more likely to lose your job or take ill than the average person. The folks at Wisebread also think “Balance Protection” is a bad idea.

Another insurance agent is camouflaged as a service representative at your local retail tire stores. Their insurance of choice is called “Road Hazard Protection” or the more creative name, “Tire Reimbursement Plan”. The idea is, if your tire should become defective due to a pot-hole or a big nail or some other road conditions, they will replace the tire at a prorated amount, based on how much tread-life remains in the tire. (They have several other add-on gimmicks to pull dollars out of you pockets, but we can discuss those some other day.) The insurance premium is about $5 per tire. Once again, you should ask your self why they would offer such a program. Well, keep reading.

Even if you ruin a tire that very day and get a brand new one this is not a good investment. Here is why. I have been driving for 46 years. I would estimate I had to get a new set of tires once every 3 years. That means I have purchased over 60 tires. If the insurance for each one of those tires cost me $5, I would have paid approximately $300 altogether.

In all of that time, I can only think of one tire that would qualify as damaged by the road in some way (boucing off of curbs does not qualify). Therefore I would have collected $75 or so on that one occasion and I am still a net loser. However, there are mitigating factors that further diminish the value of the claim. For example, some tire defects would be covered for a while on a standard warranty, so during that period the customer has double coverage.

Next, tires are well-built and don’t have a lot of problems like that (otherwise the retailer would not offer to replace them). Next, if the tire should only have 10,000 remaining miles on it when the damage occurs, the customer does not get a new tire. You get a prorated discount off of the cost of your next tire. That might mean just $15 or so. If you pay a little attention, there are always sales that will afford that much of a discount. Another question is, “What happens if they don’t make that particular tire any more?” Answer: They will probably try to sell you five new tires. Finally, this is one of the reasons you carry a spare tire. Perhaps you can just use that.

Earlier, I pointed out that plenty of the people who sell various types of insurance don’t even know what they are talking about. Gene Grant is a perfect example. He has 25 years in the auto industry, and thinks that these plans are a good idea. But he only tells you about the one time you file a claim. He never mentions all of the lost dollars that I noted in the previous paragraphs or the aggravation to get your refunds when you do file a claim. Oh by the way, guys like Gene frequently get a nice bonus commission when they sell “Tire Reimbursement Plans” so they have no benefit to discourage such purchases.

So you see, there is practically no justification for anybody to pay for Road Hazard Protection. The retailer wins even if you have claims, which in my case only happened to one tire out of sixty anyway. Therefore, just say no thank you to Road Hazard Insurance unless you drive on a lot of broken glass, dirt roads or other substandard roads.

Come back soon and we will talk about more sneaky insurance, including one of my own mistakes with sneaky insurance.

Also, drop by my Human Interest Blog. The current topic is Hoarding and Pack Rats. See you then.