Just before you get out your wallet to pay for a new TV, the salesman suggests you take out an extended warranty, claiming it will provide extra protection you won’t otherwise have.
However, for goods bought after 1 January 2011 you already have guaranteed protections under the Australian Consumer Law (ACL), including replacement, refund and compensation for goods of unacceptable quality. And there are no specific time limits on how long something should last, so you may still be covered after the manufacturer’s warranty has expired.
Extended warranties can also be quite expensive. For instance, a four year extended warranty for a cheap $499 TV can cost $180.
Tip: Ask what protections – if any – the extended warranty would provide over and above the consumer guarantees under the ACL.
Lender’s mortgage insurance
Mortgage insurance doesn’t insure you, but the lender – it protects them if you default on the loan and your home is sold for less than what you owe. The insurance compensates the lender, but that doesn’t mean you’re absolved from the debt – the insurer can still chase you for it.
It’s normally compulsory if your deposit is less than 20%. The higher your deposit, the cheaper the insurance. If you want to buy a house worth $500,000 and have a $25,000 (5%) deposit, mortgage insurance can cost you about $15,500. But if you can save a deposit of $50,000 (10%) instead, it may only cost about $8000.
Tip: Take into account the cost of mortgage insurance when shopping around, as this varies between lenders.
Credit protection insurance
Credit protection insurance (also called consumer credit insurance) covers your credit card, personal loan or mortgage repayments if you get sick, lose your job or, in the worst case scenario, die. It’s very expensive and has a lot of limitations and exemptions.
ANZ Credit Card Insurance, for example, costs 85c per $100 of the closing balance of your credit card, and is still payable even if you pay off your closing balance in full. If you have an average closing balance of $2500, it will cost you $255 per year. If you suffer a critical illness, total or permanent disability or die, the insurance pays off your credit card in full (up to $50,000), though in our example, you’d only receive $2500.
CHOICE isn’t convinced this insurance would normally cover your needs – if something seriously goes wrong, a $2500 credit card bill may be the least of your worries. Taking out either life or total and permanent disability insurance (TPD) through your super fund is a better and more cost-effective option.
According to Rice Warner Actuaries, for the same premium of $255 you could receive a benefit close to $380,000 with a major super fund, part of which could be used to repay your credit card debt. If you were to take out life insurance alone, the benefit from a policy with a $255 annual premium would be about $770,000. Another option is to set up an emergency savings fund.
Tip: As a rule of thumb, the sum insured for life insurance should be 10 times your annual salary.
Funeral insurance plans are regularly spruiked on TV. Ensuring your family doesn’t suffer a financial burden in the case of your death is a good idea, but with funeral insurance your premiums can add up to several times the benefit your family receives. Some premiums go up every year, and your cover may cease if you miss even just one payment. And, should you cancel the policy, you normally won’t receive a refund for the premiums paid.
Better alternatives are prepaid funerals and funeral bonds. With a prepaid funeral, you pay for all or part of a funeral – usually at today’s prices – and it’s covered when you die regardless of how much it costs at that time. Funeral bonds are usually offered by friendly societies or life insurance companies, and the money you invest can only be used to cover your funeral – it cannot be accessed earlier or for any other reason.
Another option is life insurance or even a special savings account.
Tip: Don’t forget to let your family know about your arrangements.
ID theft insurance
Insurance against identity theft won’t protect you against becoming a victim of identity fraud but only help with the costs of dealing with this type of theft, such as mailing letters to your creditors and perhaps some legal fees. Your bank will usually already cover the costs of credit card fraud, which is one of the common problems.
Instead of insurance, take steps to protect yourself by, for example, keeping your personal documents safe, shredding documents such as bank account statement before throwing them away, using up-to-date anti-virus software and never giving your personal information to someone you don’t know without making sure they’re legitimate.
Tip: To make sure no-one is using your identity for setting up bank accounts (for example), check your credit file every year. You can order it for free from credit bureau Veda Advantage.