Life insurance is important—you know that. But just because something offers you “peace of mind” doesn’t mean it’s beneficial. What types of life insurance should you think twice about getting? Here are five types to say “no” to:
Children’s Whole Life Insurance
Usually marketed as a college savings plan, a “head start” for your kids, or guaranteed life insurance for a lifetime, most life insurance products for kids are simply a whole life policy. Whole life is a type of life insurance that sets aside a portion of your premiums to a sort-of savings account that builds cash value. Though it’s very cheap, it can be very costly—the fees in these types of policies are high, especially in the early years. I recently overheard a sales pitch at a Starbucks where an insurance salesman was recommending two young parents open this type of policy for their three-year-old son. The premium was $50/month. At age 18, the projected value in the account was less than the total premiums over those 15 years. In other words, the rate of return was negative!
If you want to save money for your kids’ college, consider a 529 Plan. Want more flexibility on what the money is to be spent on? Investing in a brokerage account or an UTMA account are both popular choices.
Mortgage Protection Insurance
After you get a mortgage and purchase a home, you will get several offers in the mail for “mortgage protection insurance.” While it sounds like a worthy option, this is nothing more than an expensive life insurance policy. Unlike traditional term life insurance, the death benefit for mortgage protection insurance decreases with the balance of your loan. Furthermore, your beneficiary loses flexibility because the death benefit can only be used to pay off the mortgage. Especially in today’s low-interest rate environment, your beneficiary might not find it advantageous to pay off the mortgage! With traditional life insurance, your beneficiary maintains full control over how that money is used.
Accidental Death & Dismemberment (AD&D)
Just like the name suggests, AD&D insurance pays out a benefit if you die in an accident or if you are dismembered (i.e. become blind or lose a limb). Because of these restrictions, you are better off with traditional term life insurance and disability insurance. Many banks and credit unions offer their customers a small AD&D policy for free with the hope that they sign up for additional paid coverage. Often times these offer letters detailing the free coverage are intended to confuse the consumer into signing up for a higher amount for a quarterly fee.
Variable Universal Life (VUL)
Variable Universal Life is an expensive way to insure yourself. Looking at a VUL as an investment? It’s an expensive way to invest, too. VUL’s combine universal life insurance with mutual funds. Because of the life insurance aspect, the costs tend to be very high. If you have a VUL that you are using primarily as an investment, make sure that you are contributing the maximum to your Roth IRA and 401(k) first. If you’ve done that, consider how a VUL would compare with investing in another vehicle like tax-efficient mutual funds.
Return of Premium (ROP) Life Insurance
Return of premium is actually a type of rider that is added on to a life insurance policy (for an added fee to your premium). It is designed to return your premiums to you if you survive the term of the policy. It sounds good, which is why it’s an easy sale for the insurance company! However, doing a quick calculation can prove why it doesn’t make sense for you. Instead of paying the fee to the insurance company for the rider, investing that amount every month/quarter/year in a mutual fund will give you more in the future than what you would get back from the insurance company if you had the ROP! Not sure how to calculate this? Send us a message and we’ll be glad to help.
As you can see, all these products are very beneficial—for the insurance company! Knowing what you should and shouldn’t buy is what makes our insurance planners easy to work with.
Do you have questions about your current policies? Do you currently own one of these products and are you wondering what your next step should be? Before you do anything, connect with us below!
Want to learn more about life insurance? Let us know below.
Jake is a co-founder and Director of Investing at Stewardship Financial. In his role he gets to help people make smarter decisions on how to invest in the capital markets.