The 6 Most Common Insurance Rip-Offs in the U.S.

The insurance industry is a respected, rather conservative, industry. However, there are some agents out there who prey on insurance shoppers, either to make a quick sale or because they are simply misinformed about the lines of insurance they are selling. While many of the policies and procedures described below are not against the law or liable to getting classified as predatory practices, in most cases certain insurance products or constraints around certain insurance products are not widely recognized by consumers who then get ripped off. Here is a list of what SmartFinancial experts decided were the biggest insurance rip-offs in the U.S and why we feel they are best avoided altogether.

Key Takeaways If the price on a homeowners insurance is much cheaper than other quotes you’ve received, look into what it covers. You’re never insured for your land with a home insurance policy, only for what it will cost to build the home itself and all attached structures. If your kid isn’t allowed to drive your car, don’t pay for it by listing them on a car insurance policy. If you have an old clunker and have full coverage car insurance, you were ripped off or you didn’t think to remove the coverage as the car aged.

1. Homeowners Policy Priced at Home Value

Never buy home insurance coverage at the market value of your home. You’re paying for far too much coverage if you do. You only need enough coverage to rebuild your home to its current condition if it’s ever fully destroyed. Coverage is usually sold at 100K increments. Consider the type of materials used to construct your home and the rise in labor costs too.

When buying a homeowners insurance policy, it doesn’t matter if you have a quarter acre of land or 2,000 acres, because you’re only covering what it would take to reconstruct your house. Included in a homeowners insurance is personal property coverage, which should cover everything you own, including clothing, appliances, furniture and more.

Expensive items, like engagement rings and luxury watches, should have a separate rider, as should other expensive things kept in the home.

2. An HO-1 Homeowners Policy

Most of the time, you’ll get agents who will try to upsell you, but there are the instances in which a broker or agent is so hungry for the sale that they will sell you a very barebones policy, like an HO-1 policy, which most insurers do not push, simply to make a sale. How it works is this: If you’re shopping around and they know you’re comparing prices, they will sell you a fire policy, which only covers fire and is not sufficient for rebuilding a home due to any other type of peril. If the price seems too good to be true, it probably is.

Most Americans buy an HO-3 policy, to have comprehensive coverage that will cover fire, storm, burglary and more.

Floods are never covered by homeowners insurance, so consider buying a separate policy, especially if you live in a flood zone.

3. Mortgage Life Insurance

This product claims to pay for your mortgage if something happens that you become unable to work or if you die. However, a life insurance policy would do that and help your partner financially too. Plus, you need mortgage life coverage less each year, as you approach a pay-off, but monthly premiums remain the same.

4. Young Drivers on a Car Insurance Policy

When an insurance agent asks you for the names and ages of all the people who live in your home, rarely will they tell you that these people will affect your car insurance rate. Young drivers with minimal driving experience can wreak havoc on that rate.

If your kid is off to college and only borrows the car during the summer, exclude that child on your policy, add them during the summer and take them off again come fall.

It really is that simple. Otherwise, you’re paying a really high rate under the assumption that the young driver will be apt to borrow your car at certain times. Let’s say your child lives at home – again you can exclude that child if they are strictly forbidden from driving your car. Your car insurance rate will thank you for it, unless you let that young driver take the wheel. If they have an accident while being excluded on your policy, you’re in for some expensive out-of-pocket costs because your insurer will not cover the accident.

5. Full Coverage on an Old Car

Most agents will sell you full coverage, even if they know better. Some are just not that wise to why it makes little sense to have collision and comprehensive coverage on a car that is worth $4,000 or less. Some people even say $5,000 or less.

This is how it works: Your insurer will only pay out the full value of your car the day the accident happened, minus the deductible. You will never get more than that. The way to figure out what that value is is to look at Edmunds or Kelley Blue Book. Values may range according to mileage and extras.

Your deductible is set at whatever amount you chose it to be when you signed up or renewed your car insurance. A deductible can be as low as $200 or over $1,000. The higher it is, the less you pay each month, but come time to get the car fixed or replaced and it’ll be subtracted from your claim payout.

So, let’s say the car is worth $3,000 and your deductible is $1,000: You’ll get back $2,000 but will have paid almost that much – or even more – in monthly premiums.

6. Catastrophic Health Insurance and Disease-Specific Policies

Nothing can replace a robust health insurance policy. Buying a catastrophic health plan or a cancer policy because your mother’s uncle had thyroid cancer is not the way to go. You may end up getting diabetes and never getting cancer but you’ll have a hard time paying for insulin and blood thinners because you have cancer coverage only. Don’t buy ailment-specific policies, in general, which may end up being a waste of money. Just buy a solid health insurance plan with robust enough coverage to meet the projected year’s worth of medical expenses and more. Most policies come with free preventative care and screenings. And you may pay more each month for a better policy, but you’ll reach into your pocket less when you get the care you need.