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The breakdown: 7 types of insurance you should know about

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Insurance is often essential, but not always. Here are a few types of coverage you should investigate before purchasing.

Insurance is often essential, but not always. Here are a few types of coverage you should investigate before purchasing.

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Some types of insurance are must-haves, not just to cover the expenses of unforeseen circumstances but also to comply with the law. Most states require motorists to have liability coverage, and Americans have been alerted the past two years via the Affordable Care Act to obtain health care insurance or face consequences.

But other types of insurance are more subject to debate, at least in terms of their necessity. It takes a savvy insurance consumer to pore over the pros and cons of purchasing various types of coverage ranging from car rental and flight insurance to life insurance for the children and family pet.

The decision is often a personal one — what may be pointless to one person may seem irreplaceable to another. Every type of insurance deserves careful thought before buying. Below are seven types of insurance along with observations from experts who offer insights into questions consumers should have answers to before inking a check for any kind of coverage.

Car rental insurance

Making sure you’re protected when driving a rental is perfectly sensible. What may not be prudent is needlessly doubling up on coverage.

Before signing on for renter’s insurance that many car rental outfits push, check with your insurance company. The coverage that you already have on your own cars may also apply to any rental.

“Give your credit card company a call,” added Eric Stauffer of ExpertInsuranceReviews.com, an insurance consumer website. “They may offer liability coverage.”

Make a special point to be proactive if you’re renting a car outside of the United States, Stauffer said. Coverage needs will differ in foreign countries, so be certain that whatever insurance you already own applies and offers sufficient protection.

Insuring older cars

A new car is a shiny, immaculate gem. Even the slightest ding can justify a prompt repair, which makes collision coverage a justifiable expense.

Not so with older cars. The tipping point is when the constantly dropping value of the car falls below the insurance premium and deductible, which may cost more than what the owner might receive from an insurance claim. If that’s you, give some thought to zapping both collision and comprehensive coverage (this covers things like theft, fire and other mishaps). Liability coverage is required by law in most states.

“The only reason to carry it would be if you still have a car loan that requires you to do so,” said John O’Brien, a Chicago attorney who has handled a number of insurance-related cases. “Otherwise, the risk-reward benefit isn't there.”

When is the optimal time to lose collision and comprehensive coverage? Check the approximate current value of your vehicle at websites such as Edmunds.com and Kelley Blue Book. If the replacement value is less than 10 times what you’re paying in premiums, consider making the change.

Catastrophic illness coverage

The thought of contracting a serious disease such as Alzheimer’s or cancer is understandably distressing. But spending money to protect yourself against a specific malady is likely wasteful, experts say.

Catastrophic illness coverage is designed to address the expense that can result from particular health problems. Some policies come in the form of supplemental insurance, which augments basic health insurance, while others are stand-alone policies that pay out a lump sum, which can be used for medical care, expenses, lost wages and other costs.

Given the skyscraper-size bills that can come with fighting a protracted, serious disease, investing in catastrophic coverage may seem worthwhile. But there are caveats galore. Some policies may not pay out a dime until you’ve had the illness for several years. Others limit the specific forms of disease covered by the policy (for instance, some cancer policies exclude skin cancer).

“Unless there are really extraordinary circumstances, buying this type of insurance is a sucker’s bet,” said O’Brien.

But certain “extraordinary circumstances” may warrant consideration of catastrophic illness coverage, such as an established family history of a particular disease. If that’s the case, review the restrictions and look for coverage of preventive screening and experimental treatments.

Children’s life insurance

If ever a product was designed to yank at any parent’s heartstrings, this might be the one. Children’s life insurance provides financial protection in the event of a child’s death. Coverage limits are relatively low at the start and may increase as the child grows older.

Some insurers recommend such insurance as a means to save for college. Others point out funds may be used for burial costs and other final expenses. Insurability is yet another pitch, particularly for families with a history of poor health, to get life insurance before the kids get older and, in theory, become more difficult to insure.

But children’s life insurance warrants careful review. For one thing, said certified financial planner Faye Doria, insuring a child runs counter to the very premise of buying life insurance — to protect a family from significant financial hardship caused by the death of a loved one. Unless your youngster is a TV star or musical wunderkind, there’s really no financial stake to protect.

“Plus, the amount that most kids can be insured for is really a drop in the bucket,” adds Doria, based in Dover, New Hampshire.

As for the college savings angle, Stauffer points out that the amount the child could receive is roughly the amount paid into the policy. Far better, Stauffer advises, to boost a parent’s life insurance policy and fund a 529 college savings plan, which will almost certainly pay out more come the time to head off to college.

“These policies are almost predatory the way they play on people’s emotions,” Stauffer said. “Unless you have a child who is somehow or other supporting a family, they simply make no sense.”

Easier coverage calls

Some types of insurance may appeal to some while utterly repelling others. Then, there are other forms of coverage the genuine need of which is a good deal more questionable:

• Flight insurance: Airplane travel isn’t the same in the post-9/11 world. But statistics suggest there’s only a one in 11 million chance of dying in an airplane crash. And, if those numbers aren’t comforting enough, you’re probably already insured if you paid for your ticket with a major credit card. Check with your card company.

• Credit life insurance: This coverage for obligations such as a mortgage, credit card debt or a car loan pays off the lender in full if the borrower dies before the loan is paid off. That may sound like a solid idea, but credit life coverage is considered one of the most overpriced forms of coverage on the market. On top of that, survivors aren't on the hook to pay off the deceased's debts unless their names are also on the account. If debt is of concern, just buy more life insurance.

• Pet insurance: Call this a four-legged variant of children’s life insurance. Unless your dog’s name happens to be Lassie, whose income warrants a higher credit score than your own, treat your pet to a yummy chew toy and pocket the remainder.

Jeff Wuorio lives in Southern Maine, where he covers personal finance and entrepreneurship. He may be reached at jwuorio@yahoo.com. His website is jeffwuorio.com.