Posted by Kerry
There are numerous types of life insurance products available on the market today. When you’re looking to insure a loved one, the choices can be overwhelming and it’s not hard to be sold a policy that is fat with sales commissions and may not fully meet your personal needs. To help you navigate the confusing world of life insurance, here are three types of policies you should probably avoid:
1. Whole Life Insurance
Whole life insurance policies come with many names. They can be called whole, universal, or variable life insurance, but the premise is they combine life insurance with an investment portion that builds up a cash value. What your insurance agent isn’t telling you though is you’re paying up to 1,000% more in fees for this “added value”, and this can leave many families underinsured. For the same amount of coverage — let’s say $150,000 — cash value polices can cost up to 10 times more than a comparable term life policy. Ouch!
If you have dependants to support, then shop around and get a term life insurance policy. Term life is pure life insurance where you pay an annual premium to receive a decided amount of coverage — much like automobile insurance.
See How to Buy Life Insurance for some easy-to-follow tips.
2. Mortgage Life Insurance
It’s seems like a good idea to sign up for life insurance right after the bank gives you a mortgage. No one wants to leave their spouse with a huge unpaid debt. But think again before buying into this policy. Mortgage life insurance generally only covers the outstanding principal on a mortgage should the policy owner pass away. The premiums stay the same even as the mortgage reduces as you pay it off. Does it make sense to pay the same premium for less and less value? Probably not. By skipping mortgage life insurance and shopping around for a term life insurance policy, you can cover your family above and beyond the mortgage for half the cost. See Ellen Roseman’s Perils of a mortgage life policy for further details.
3. Life Insurance for Kids
You want to be the best parent possible, so right after having your baby you are sold life insurance for your child. This happens to many new parents as they navigate through the myriad costs of parenthood. But this is one cost you don’t need to incur.
The general purpose of life insurance is to serve as income replacement for the insured’s dependants if the family breadwinner is to pass away. Because children are dependants, it makes little financial sense to insure them.
Many parents buy these policies because an agent sells them on the investment aspect of a cash value policy. But if you want to open an investment your child can really benefit from, put your money into a Registered Education Savings Plan (RESP) for your child’s post-secondary education. Unlike a cash value life insurance policy — which can boast lucrative commissions for the selling agent — an RESP has real advantages where the earnings are sheltered from tax until drawn out for the child’s education.
Your Turn: Do you have life insurance? Were you sold one of these policies?