I love life insurance. Because my father bought a term life policy shortly before he was in a fatal airplane crash, my siblings and I were able to go to college and build lives for ourselves. And I love life insurance because of the protection it provides for my wife and kids.
But that doesn't mean I love all life insurance policies. In fact, most life insurance policies are sold to the wrong people for the wrong reason. Here are four of the worst offenders:
Whole Life
Whole life insurance is expensive and dangerous. It's expensive for two reasons. First, there is a "savings" element to it over and above the pure cost of insurance. That tacks on a big cost. Second, life insurance agents make a ton of commissions on it and that adds significantly to the cost as well.
Agents often sell whole life with the foggy promise of the investment element growing. They claim that these investments will eventually grow and make so much money that the policy will pay for itself. It would be great if that were the case. But if you really work the numbers of whole life, you'll see that this argument is a bunch of hooey.
Whole life is dangerous because it is so expensive. It soaks up so much of your cash, you may not have enough money to buy all the coverage you really need. As a result, many people go terribly underinsured and it's the family that pays the price.
There are a few people who need whole life but most people don't. You are probably better off if you stick with term, my friend.
Accidental Death
Accidents happen. Terrible accidents happen. But they don't happen often. Your chances of dying in an accident are pretty low. The reason accidental death insurance is so cheap is because the companies who sell it rarely have to pay claims.
Once you know how much life insurance you need, buy it. This has everything to do with your spending and lifestyle. And it has nothing to do with how you die. Think about it. Would it matter to your family how you died? Not in the least. My father died in an airplane accident and it was a tragedy that changed our lives. But the fact that he died in a plane rather than some other way had no impact what-so-ever on our financial situation.
Get the coverage you need and keep it. Don't waste your money on accidental death insurance. It's a waste.
Life Insurance For Children
Life insurance is a tool that is meant to replace lost income. Children generally don't work so they have no income to replace. As a result, kids don't need life insurance.
Life agents try to convince you to buy this insurance as an investment for the kids. But if you compare this to a pure investment you'll see that it makes no sense. The reason? The life insurance element is just too expensive.
I'll admit that life insurance for kids might make sense if you have very limited resources and wouldn't be able to pay for a funeral if a child died. But if that's the case, all the more reason to buy a term policy for your child rather than a whole life policy. And if you go that route, make sure to cancel the policy as soon as your situation improves.
No Medical
These days more and more people want to buy term insurance without taking a medical exam. Some just don't like going to doctors. Others hate needles. Some don't have the time to go through the full process of buying life insurance. And other people go this route because they fear it's the only way they can obtain the life insurance they want.
These arguments have some validity. But the benefits are not worth the cost. If you buy term insurance without a medical exam you're going to pay a lot more for that coverage year in year out. Why settle for that?
If you don't like going to doctors or having your blood drawn get over it.
If you don't have time, get the no medical coverage now but also apply for a normal term policy and cancel this one as soon as the fully underwritten policy is in place.
If you fear that no company is going to write a policy on you if they do a full physical, think again. "No Physical" insurance is still underwritten. The company is still going to get your medical records and ask you about your health. If you fail either test, they won't provide the coverage.
Life insurance is your most important financial building block. But think about which life insurance works best for you. There are many insurance products like the four presented above that may seem to make sense. But if you really think it through you'll see that these are just a big waste of money.
Do you think there are good reasons to buy these types of policies? Why or why not?