You’ve seen the commercials. Perhaps you’ve been approached about it at work or received an offer in the mail. I’m talking, of course, about narrow-coverage insurance policies. Health policies that protect against specific diseases such as cancer. Life insurance that only pays off certain expenses, such as your mortgage. Homeowners insurance that only pays certain types of claims, such as liability judgments. While these policies may or may not have a place in your personal finances, you’re almost always better off buying the broadest coverage available.

Why Broad Coverage Wins Out

One of the fundamental tenants of insurance is the concept of risk sharing. If I own a home, it’s very unlikely my roof will blow off in a tornado. Likewise for your home or any home. The individual risk of loss is exceptionally small. Unfortunately, the consequences of being that one in a million home hit in the next big tornado would be devastating without proper insurance coverage. While the risk of loss is small, the financial costs of taking that loss would be too much to bear for all but the richest of homeowners. Enter insurance, which allows groups of homeowners in different geographical regions to pool their resources to mitigate the cost of any one person’s loss. If a tornado hits in Georgia, it’s unlikely to also hit in Utah, so there will always be enough winners to help absorb the losses of the losers. Narrower coverage criteria means less risk pooling for the insurer, which means higher premiums.

A far bigger reason to avoid narrow coverage is that people tend to systematically over-estimate the probability of rare events if they are vivid events. Everybody knows somebody with cancer and and it’s not difficult to imagine yourself or a family member developing it, so we tend to overestimate the probability we’ll get cancer. The insurance companies, more than happy to capitalize on this human trait, underwrite cancer protection policies that only pay out if you get cancer. Problem is, a general health insurance policy would cover both cancer and other types of health problems for only a little more money. It’s not difficult to figure out which is the better deal.

An Example: Mortgage Life Insurance

Mortgage life insurance is a tricky product because at first glance it sounds like a good idea. Who wouldn’t want to protect their family from losing their house should the breadwinner die? Unfortunately, these policies are almost never a good idea. Why? Because as you pay down your mortgage over the years, your benefit decreases in value with it. 20 years from now, your mortgage life policy will be worth a fraction of what it is today. Your premiums, however, will stay the same. In almost all cases, you would get better insurance protection at the same price or cheaper with a traditional term life insurance policy. That way, your benefit never goes down and if for some reason your heirs don’t need to pay off the mortgage in the event of your untimely demise, they’ll have the beginnings of a nice little nest egg to provide income to live on in the future.

Think twice before buying narrow insurance coverage. Do the math to make sure you’re really getting a good deal.