It’s my opinion that too many people buy insurance policies that should be avoided. I’m not talking about auto, home, health, life and long-term disability insurance policies. Ignore these at your peril. I’m talking about insurance policies that offer questionable value for most people because they are over-priced or offer unnecessary protection.
Here are five examples of insurance policies that I believe most people should avoid.
Mortgage Life Insurance
Banks love to offer life insurance policies that pay off the mortgage if you kick the bucket. But before you sign up, ask yourself, “Who do I want my money to go to when I die?". Mortgage life insurance takes that decision away from you and your family. The mortgage may be paid off, but what if the best decision upon your death is to do something different with the money?
What you really want is a personally owned Term Life policy. It gives you and your family full control over the proceeds and may be far less expensive to own than mortgage insurance.
Optional Group Life Insurance
Many employee group insurance plans allow you to buy extra life insurance amounts beyond the basic plan maximums. Some plans even allow you buy this coverage without proof of good health. While it’s easy to enroll and could be a real life saver to someone who is uninsurable, here’s the rub: If you are a healthy nonsmoker, a personally owned insurance policy will probably cost significantly less. What's more, should you leave your job; you can't take your group life insurance coverage with you. The personally owned policy is yours to keep.
Explore a personally owned life insurance policy before you sign up for your employer’s optional life insurance.
Accidental Death Insurance
Accidental Death insurance covers you for some, although by no means all, of the gruesome ways you could die accidentally — that is, something other than disease. However, contrary to popular belief, the vast majority of people will die from disease, not accidents. As a result, it’s extremely unlikely that a claim will be paid under an Accidental Death policy.
A regular life insurance policy is always the best choice because it will cover you for both accidents and illnesses.
Insurance for a child under age 18
The main purpose of life insurance is to provide financial protection for your family and loved ones after your passing. Although you can insure the lives of your children, why would you? Some would argue that it guarantees the child will have insurance should their health change and render them uninsurable. That’s possible, but the odds that a healthy child’s insurability will change before they are capable of buying insurance on their own are very low. What’s more likely is that your kids will outlive you.
If you really want to help your kids, use the money you’d spend on a children’s policy and buy insurance where it’s really needed — on your life.
Extended warranties on consumer electronics
Surprised to see this on my list? Extended Warranties on consumer electronics are insurance policies and the worst buy on my list. According to industry experts, the vast majority of defects are discovered during the manufacturer’s warranty period. In addition, electronics are evolving at a pace that renders most items obsolete within a year or two. As a result, most people choose to replace rather than repair.
Electronic retailers encourage their sales people to push extended warranties because they are extremely profitable, not because you really need the protection. Stick to reliable brands and save your money.
Why do people buy these policies?
I believe many risk averse people are misinformed about their real odds of having a claim in relation to other risks, while others are simply unaware that they could qualify for significantly better, less expensive alternatives. However, for many people the answer has to do with what psychologists call framing.
Framing refers to our state of mind in the moment of decision. People tend to reach buying conclusions based on the 'framework' within which a situation was presented to them. For example, a consumer considering a life insurance purchase is reminded of their long drive to the cottage every weekend and the accidents they’ve seen over the years. The worry of being killed in a car crash, however remote the possibility, results in the decision to divert part of the purchase toward an Accidental Death policy. The consumer believes it’s a small price to pay in relation to the perceived risk.
When you buy insurance, you want a balanced portfolio. Let facts and logic drive your decisions and avoid purchases of narrowly focused single-purpose coverage at the expense of better alternatives.
Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, the CBIA offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local insurance sales representative who can assist you with your insurance questions and needs.
I heartily agree with all of your choices but 1; life insurence on children.
After having seen friends of mine go bankrupt after their daughter died suddenly I realized the value of life insurence on children. Not only did they not have the money needed for a funeral but the bread winner of the family was not capable of returning to working right away. A childs death is devistating and you can't always go back to work quickly, although some people may find it okay, theraputic even, sometimes your family needs you. My friend used up all his vacation time, stress leave time and any other leave he could find to stay home with his wife and children. It wasn't enough. Had they had life insurence he could have taken more time to be with his family when they needed him.
I have a small insurence policy on both of the children. It's basically enough to allow me to pay for a funeral and take 6 months off if I need it.
I know I will need it and the peace of mind of have knowing that I can do both those things – priceless.
Hi Cathi
Thank you for pointing out some valid reasons for owning children’s insurance. Had space permitted, I would have pointed out more examples like yours. I don't expect everyone to agree with me, but I included Children’s Insurance because I believe that most, but not all, professional income families are not exposed to enough financial risk to justify the extra cost of this insurance.
While the death of a child is extremely tragic, the odds are very low and any associated final costs should not result in a catastrophic financial loss for a typical professional income family. A mental breakdown of a grieving parent is not uncommon. However, an inability to earn all or part of an income for an extended period is best protected against with a disability income replacement policy that includes partial or residual income protection and a short qualification period.
As a parent of 3 girls, the death of a child is unthinkable. However,I do have some peace of mind knowing that the rate of death of a female between ages 5 and 14 is very small at only about 1 in 10,400 annually. However, the death rate of a woman between ages 35-44 is approximately 1 in 1100 annually and for a male of the same age, it's approximately 1 in 670 annually. Given these odds, parents need to be 100% certain they have covered all their personal insurance needs and understand the financial significance of any unprotected risks before they consider insurance on their children.
Thanks again!
Mike