The Motley Fool: Don’t find yourself over-insured

Insurance is too important to ignore. It’s critical to have it for your home, your health, your car and often your life. There are other kinds of insurance that can serve you well, too — such as disability insurance, renter’s insurance or long-term care insurance.

But not all insurance is equally valuable. Don’t be over-insured. Don’t buy insurance you don’t need. Consumer Reports magazine listed several kinds of insurance policies that most people don’t need. Here are some of them:

“ Mortgage life insurance. A cheaper way to pay off your mortgage if you pass on is through term life insurance.

“ Credit card-loss prevention insurance. Instead of forking over more than $100 per year for this, know that by law your losses due to card theft are capped at $50 per card.

“ Cancer insurance. For many of us, our regular health insurance plan will cover medical expenses related to cancer treatments. So don’t buy this unless it offers more than you have, at a reasonable price.

“ Accidental death insurance. Since you’re extremely unlikely to die via an accident, term life insurance is a more logical investment.

“ Involuntary- unemployment insurance. This is designed to make minimum payments on your credit card or auto loan debt should you become unemployed. Instead, simply maintain an emergency fund that can cover your living expenses for three to six months or more. Drop by www.fool.com/savings for more guidance on how to best invest short-term money.

“ Flight insurance. Sorry, but you’re extremely likely to survive every flight you take. If you’re concerned about premature death, look into term life insurance.

“ Life insurance. Even this can be unnecessary for many people. If you’re single and childless, for example, and no one depends on your income, skipping it may be best. Life insurance is meant to protect critical income streams.

Learn more about insurance and choosing it well at www.fool.com/ insurancecenter and (the not unbiased) www.iii.org.

Ask the Fool

Q: What’s a dividend? — S.M., Watertown, N.Y.

A: It’s a portion of a company’s earnings, paid out to shareholders. If Home Surgery Kits (ticker: OUCHH) earns $4 in profit per share, it might decide to issue $1 annually to shareholders, using the balance to build its business. If so, it will probably pay out 25 cents per share every three months. This may seem like peanuts, but it adds up. If you own 400 shares of a company that’s paying $1.50 per share in annual dividends, you’ll get $600 per year from the company. Plus, healthy companies generally increase their dividend amounts periodically.

Dividends are often expressed as yields. A company’s dividend yield is its annual dividend divided by its current stock price. So a company paying $2 per year and trading for $50 per share would have a yield of 4 percent (2 divided by 50 is 0.04).

Q: What’s a “beneficial owner”? — R.Y., Ashland, Ky.

A: The term refers to the true owner of a security, such as a stock. If some assets are held for you in a trust through a brokerage, for example, you’re the beneficial owner. It’s a common practice for brokerages to hold stocks in “street name” (i.e., their own name) instead of putting the shares in your name. This is routine, and the shares still belong to you — you’re the beneficial owner. It often makes sense to leave shares in “street name” instead of having them registered to you and getting the actual certificates sent to you in the mail. When you’re ready to sell, you won’t have to dig up and mail back the certificates.

Learn more about brokerages at www.broker.fool.com and www.sec.gov/answers/ openaccount.htm.

My dumbest investment

My dumbest investment was in a stock that sank. While I did manage to at least sell off about half my investment awhile back, I also averaged down at various times, both before and after that sale, adding to my shares. My total carnage appears to be about $15,000. Ugly. The value of my remaining stock is about $1,400, and it’s hardly worth selling at this point. I think I’ll just consider it an option on a miracle now. — J.D., Pittsburgh

The Fool responds: Averaging down, where you buy more shares of a holding that’s fallen in order to lower your cost basis, is sensible only when you’ve done your homework and are very confident in a rebound. When a stock falls sharply, there’s often a good reason for it. Hang on only if the reason is temporary and not too worrisome. You might want to sell your remaining shares soon, though, for the tax loss (unless they’re in a tax-advantaged account such as an IRA), and invest the proceeds in something that’s more likely to grow.