Life Insurance: 4 Policy Types You Can Do Without And Should Avoid

The following post was written by Liran Hirschkorn. He is an independent life insurance agent. He helps individuals shop for life insurance, and he also specializes in helping those previously declined get approved for coverage.

As a life insurance agent I often see other agents who don’t always make the best recommendations for their clients. Unfortunately, the insurance industry is based on commissions and there are agents that can’t resist the lure of extra money in their pockets. I’ve written this blog post to make you aware of what to avoid when it comes to policy types.how to build and save for and emergency fund for insurance

As a consumer, you must understand the purpose of life insurance before you run out and purchase the biggest and shiniest insurance product. Most of the time I recommend term insurance, because it’s cost effective and will provide for your family when you are no longer around. While there is sometimes room for other policy types, here are other types of life insurance you should never buy.

Types of Insurance That You Shouldn’t Get

Guaranteed issue

You’ve probably seen ads touting the merits of guaranteed life insurance all over the television- especially if you watch late night shows. The catch phrase is “you’re guaranteed a policy, no matter your age or physical condition.” Taken at face value, these policies might seem like a light at the end of a dark tunnel of rejections. But a closer inspection reveals some disconcerting flaws.

In the first instance, there’s the cloudy issue of the payouts. Most guaranteed life policies will simply return your premiums to your dependents if you die within the first two years of the policy. Therefore, it’s pointless to get such a policy if you’re suffering from a terminal illness and expect to die soon. Besides that, the inadequacy of the low death benefit is compounded by expensive premiums.

A guaranteed issue policy only makes sense if you’re in dire need of insurance and cannot get coverage elsewhere. Ask the provider about the exclusion period, and proceed with the policy only if you believe you can live beyond that period. Otherwise, put your money in the bank or invest it on low-risk investments like bonds or money market funds.

Life insurance for children

Purchasing life insurance for your children is by and large, a waste of good money. That’s because children are born healthy and stay healthy for a very long time. And because they don’t earn any income, there’s no reason to purchase insurance for kids. Not insuring your kids doesn’t mean you love them any less. It simply means you’re smart enough to put that money elsewhere- like towards the college fund they’ll need in a few years. If you still really want to make sure they have something, you can add a cheap child rider when you buy your term policy.

Travel or accident insurance

Travel insurance is inexpensive with good reason. Most travelers arrive at their destination without mishap. And it certainly doesn’t help much if you wind up in a tragic plane crash and die. Your family won’t need that extra payout on top of your life insurance. Rather than spend extra money on travel insurance, you might be better off taking that money to upgrade to first class and enjoy your flight.

Whole life or universal life

Despite what many agents tell you, life insurance should be used as a tool, not as another asset to add to your investment portfolio. The premise of universal life policies is that you’re required to pay higher premiums so the insurance company will invest the extra money on your behalf. Apart from the added cost of the policy, universal/whole life insurance is not usually beneficial because the expenses reduce the value of any interest gained.

People who invest in whole life policies usually have little to show for the money they invest. Insurance companies invest the money in plush office buildings and expensive ads – that serve little benefit for the policyholders. If you foresee a problem with estate-tax, then whole life policy may be beneficial. But apart from that, it’s a complete waste of money.

Life insurance is a worthwhile investment when you use it for its intended purpose. In my agency, I recommend my clients purchase term life coverage to protect their family, and ignore the slick ads offering guaranteed life, travel insurance, whole life, and life insurance for children because they’re policies you can do without.

Photo courtesy of  StockMonkeys.com

Mark Ross Canaoay

Hello! My name is Mark and I'm the one responsible for this website. I'm just a person with enough knowledge about finance-related stuffs. You can know more about me by liking my Facebook Page, following me on Twitter or by adding me in one of your circles on Google+.

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About the Author

Hello! My name is Mark and I'm the one responsible for this website. I'm just a person with enough knowledge about finance-related stuffs. You can know more about me by liking my Facebook Page, following me on Twitter or by adding me in one of your circles on Google+.

Comments

  1. I can’t imagine why it would be every a good idea to insure children. I mean, you are right – you wouldn’t be losing any money if they passed, and they are generally healthy. I have a great life insurance plan that I get a discount on through my workplace.

    • Agreed. The one thing about plans through your employer is that if you leave, or lose your job, you usually can’t take those plans with you, which is why many people buy an individual policy – just something for you to think about.

  2. That is a good point you shared about insurance for children. I can’t help but agree that it may not be practical to do so when generally, children are at the peak of their health and all that. Just as I was thinking though that in case the need arises, you mentioned something about a child rider in a term policy.

  3. Good info for someone like me that doesn’t really understand all these types of insurance. Thanks for the post!

  4. I think it is poor advise to make a blanket statement that one should ‘never buy’. Each policy type has its positive and negative and ALL have a place where they are beneficial. A believer in the value of insurance, especially someone who has been denied coverage later in life, will buy a permanent policy, locked in at a low level premium for their child to ensure they have coverage later in life. Whole life insurance guarantees the insured will get something for their money- whether it is the cash surrender value or the death benefit. Universal life gives a high income individual with a need for insurance a valuable tax shelter to accumulate assets. Term insurance is great for a ahort term liability such as a mortgage or loan but it is also the best moneymaker insurance companies have- because most term policies are lapsed at renewal because of the exorbitant premium.
    To focus on term as the best option becuase it is the cheapest option ignores the value of the individual insurance product; and you know what they say- price only matters in the absence of value.

    • Chris, thanks for your comments. In the policy types I listed, I did say there are times they may make sense – as far as the argument for whole life, I think you can make more money by investing the difference. Did you know that over 30% of people let their whole life policy lapse before 10 years? That means they lost a significant amount of money – and we both know life insurance companies make more money on whole life since the premiums are much much higher.

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