Contrary to what certain insurance brokers will try to get you to believe, buying an insurance policy for every occasion is not always a good idea. As everyone has a different need, it’s important to do some research and understand what the right type of insurance is for you.
Taking out an insurance policy you likely won’t ever need is a waste of money and you would be much better off if you decided to invest that money elsewhere instead.
There are also several types of insurance policies out there that make little sense for most people to buy. Let’s take a look at six of these insurance policies that you should do your best to stay away from under most circumstances.
Mortgage life insurance is designed to pay off your mortgage in the event of your death or long-term disability. While that sounds like a good idea on paper, mortgage life insurance has several flaws that make it unpractical for most buyers.
First of all, mortgage life insurance is a single-purpose policy that will only be paid out directly to your mortgage creditor, not your loved ones. You’re much better off spending a little more and buying a term life insurance that pays out enough money to cover your mortgage and goes directly to your relatives.
Another flaw with mortgage life insurance is that you lose your entire insurance once your mortgage is repaid, assumed or goes into default. Also, while your total mortgage and mortgage life insurance payout decrease every year, your insurance premium cost stays the same.
Finally, mortgage insurance is not guaranteed and is subject to a post-claim approval. This means if your claim is denied, the insurance won’t be paid out to your relatives. Once again, term or permanent life insurance is the way to go here.
Buying life insurance for your children is often unnecessary. Life insurance should be purchased as a way to cover your financial responsibilities and take care of your dependants in case of your death or serious illness.
Your children depend on you for financial support, not the other way around. So you’re much better off buying a better life insurance policy for yourself.
If you want to save some money for your child’s future, consider investing into a RESP account for them instead.
A common misconception with credit card insurance is that people assume it will pay off their entire credit card debt if they lose their jobs or become too sick to work.
In reality, credit card insurance will often only pay a portion of your monthly credit card bill (usually the minimum amount due). The rest of your debt will continue to stay on the books and accrue interest until you pay it off yourself.
Rather than relying on credit card insurance in case of an emergency, you’re better off using that money to create your own rainy day savings fund.
This is quite possibly the most unnecessary type of insurance policy on this list. Flight accident insurance covers you in case you are involved in a plane crash and is often offered by banks, insurance companies and airlines themselves.
According to Gail Vaz-Oxlade of MyMoneyMyChoices.com, you’re more likely to be struck by lightning or win the lottery than be involved in a plane crash. So, rather than insuring your life against an event that is very unlikely to occur, buy term or permanent life insurance instead.
The same advice goes for other types of accidental death insurances.
Cancer insurance is a supplemental health insurance that will pay out if you are diagnosed with cancer. Considering that having a previous cancer diagnosis makes you ineligible to apply, you would have to be pretty sure that you will get cancer at some point in your life if you want to buy this insurance.
It’s also worth noting that while cancer insurance will pay for your cancer treatments, it will not any cover other medical issues caused by your cancer or your treatments. For example, if you develop an infection during a cancer treatment procedure, you will be ineligible to use your cancer insurance to cover treatment for that infection.
Overall, unless you have a strong history of cancer in your family, you’re better off getting the general critical illnesses health insurance. This will cover more illnesses and is more likely to pay out.
Long-term care insurance (LTC) pays out if you require long-term care such as assisted living, nursing care or constant home care during retirement. This type of policy is generally a good investment but there are some key features that should be present in the policy that make it worthwhile.
Living Benefits Insurance veteran Tim Landry says “One of the things you really need to watch out for on the LTC front is the fact that most plans don’t have a premium guarantee after 5 years. Having said that, LTC is undervalued by most consumers and advisors because many feel that ‘the government will provide’. First, the government right now makes it very clear that “maintenance care” (which LTC is) has never been paid for by Medicare and frankly unless you are prepared to accept huge tax increases it will never happen. Take Sweden for example, with a publicly funded LTC plan the average income tax rate is 58%.”
Landry continues “Many advisors are reluctant to discuss Living Benefits plans like LTC because they are uncomfortable with non-guaranteed premiums. Have you ever had guaranteed health or dental or car or home insurance premiums? Do you remember when mortgage interest rates were guaranteed for the life of the mortgage? Yes the US has had premium increases but plans started there when interest rates were higher and access to benefits was easier. Lapse assumptions were more aggressive.”
