Insurance is a great product; but it is often sold to the wrong people for the wrong reasons. Insurance makes most sense to buy when the odds of incurring the expense are low but the cost of incurring expense are catastrophic. A great example of this would be term life insurance for a single mother who is the sole bread winner for the family.
If something were to happen to her, the survivors would be financially devastated. In this case, the family needs some inexpensive term insurance on mom.
With this concept in mind, let’s consider 5 different types of insurance policies that almost nobody needs…
Life insurance for kids
Remember, insurance is a business decision – not an emotional one. Chances are that your kids will live long and healthy lives. In fact, the odds of children under four dying are less than .25%.
And since we’re talking about business, let’s put this in dollars and cents. If heaven forbid your child dies prematurely, you probably would not incur tremendous financial losses because you don’t depend on that child’s income.
Now, if there is a genetic problem that runs in the family that exposes your children to higher mortality risk and/or final costs would devastate your finances, it might make sense to consider a small policy. It also could make sense to buy a policy if you think there is a high chance that your child will be uninsurable later on.
But unless you have specific information that makes you think your child is more susceptible to major illness or an early death, life insurance for children is a waste of money. Yes, there is a chance that this could go horribly wrong. But unless the financial costs would clean you out, invest the money instead for your child’s college education. It’s a far better use of the money.
Most stores push extended warranties on consumers for almost any purchase above $100. In most all cases, they are not needed and are a waste of your money.
Before you buy something, do your research to determine how long it should last and the main reasons why similar products fail. If the product is known to create problems even for people who use it carefully, that’s one thing and the warranty might pay off. But if the product is fragile and can be destroyed easily by spilling something on it or by dropping it, the extended warranty may not help. Remember that most warranties exclude coverage for problems that are not a result of defective materials and workmanship under normal operation.
Purchasing electronics items with a credit card that will double the life of the manufacturer’s warranty is a much better idea. That is a free way to get some peace of mind when purchasing a product as opposed to shelling out extra for a warranty that rarely pays off.
This is one of the most egregious insurance rip-offs there is. My father died in an accident when he was in his 40s. The financial cost to the family was the same whether his death was a result of an accident or an illness. What difference did it make to us from a financial standpoint? None. Unfortunately, dead is dead.
If you need to protect your family in case of your premature death, buy a low-cost term life insurance policy. Skip the accidental death and mortgage life insurance policies. They are designed to separate you from your money.
Umbrella insurance policies
Unlike the policies described above, umbrella policies do have their place for some consumers. Just not everybody.
Umbrella policies take over where your basic coverage ends. So, for example, let’s say you have a renter’s insurance policy that covers you for up to $100,000 liability. If you think you could get sued for an amount greater than that $100,000 cap, you might consider buying an umbrella policy.
If you did that, you could extend your liability coverage by $1,000,000 or more. That umbrella policy could provide extended liability coverage for injuries sustained on your property or as a result of a car or boating accident. It also covers your dependent children in case they cause harm to others and may cover liabilities that occur on your rental property and personal injury lawsuits filed against you.
Typically, these policies have a high deductible and the premiums are very low – maybe a couple hundred dollars a year.
With all those benefits, who wouldn’t want an umbrella policy? Well, you possibly.
First, consider increasing the coverage on the basic policies you already have in place. That could be enough. For example, it might be cheaper to bump up that liability on your auto insurance from $100,000 to $250,000 or $500,000 than to buy a separate umbrella policy. And your homeowners or renters policies might provide the same opportunity. First check there.
In addition, if you are retired on a fixed income and have very modest assets, you might not need the umbrella. That’s because would-be plaintiffs probably won’t come after you anyway.
However, even if your assets are sparse, you may want to consider this kind of policy if you are at high risk and you still earn wages. That’s because people who win a law suit against you may be able to garnish your wages if they win a claim you can’t pay.
Whole life insurance
Whole life is a type of permanent life insurance. Most people who agree to buy this kind of insurance regret it sooner or later. Here’s why.
Life insurance is meant to indemnify your family should they suffer a catastrophic financial loss at your death. That’s what term insurance is good at. Whole life – like other types of permanent life insurance — however, is very bad at doing this. That’s because whole life is sold as an investment vehicle as well as an insurance product. But it does a terrible job on both fronts.
First, the investment angle fails because the costs associated with whole life and variable life are extraordinarily high. As a result, relatively little of your premium goes to the investment. The rest gets eaten up in costs.
It also fails on the insurance side because of the cost. Whole life premiums are sometimes 10 times greater than similar term policies. As a result, many people who get stuck with whole life usually can’t afford to have all the life insurance they need.
For example, Joe might be offered a $100,000 term insurance policy for $30 a month whereby he might have to put in $300 a month for a similar whole life policy. If Joe doesn’t have $300 extra each month, the agent might talk him into putting his $30 into a whole life policy which provides 1/10th the coverage he really needs.
Insurance is an important part of your financial foundation. Use it to protect yourself and your family against the real risks you face but do so prudently. Before you make a decision about any insurance, speak to an objective financial planner and make sure you aren’t just getting sold a bill of goods.