In this world, risks are inevitable, and that’s why we have insurance: to mitigate the risks. For the price of a premium, you transfer part of your risk to the insurance company; in return, you receive payment if a problem arises. The goal is to reduce your exposure to sudden and potentially catastrophic loss, thereby protecting your financial footing and that of those close to you. Sounds good in theory, but some forms of insurance are unnecessary or may not be worth the cost.
To save money, you could self-insure, to some extent, by redirecting dollars to your emergency fund to be used in the event of a disaster. “If a person has the discipline to build adequate savings, then they can save unnecessary insurance expenses,” says Charles Sachs, chartered financial planner (CFP) at Kaufman Rossin Wealth in Miami, Florida. One example, he says, is a health plan with low out-of-pocket expenses. “They are more expensive than higher deductible plans where you rely on your savings, if you need them. “
It is good practice to review your insurance requirements periodically, financial advisers agree. To determine if a certain type of policy is foreign, look at the potential risk – the likelihood of filing a claim – and the cost of protecting against that risk, says Landon Tymochko, CFP at Leslie Roper Day & Associates at Folsom , California. You will also want to determine if the policy is still necessary, given your age and circumstances. Below is a list of insurance products that often don’t make sense to a lot of people.
The purpose of life insurance is to protect your loved ones against loss of income if something should happen to you. The need depends on your age and financial situation, says Geoffrey Owen, CFP at Front Porch Financial Advisory in Charlotte, North Carolina. If you are in debt and your spouse and others are dependent on you, this may be a good choice. This may not be the case if you have little or no debt and your retirement assets are substantial. “Whole life insurance policies don’t make sense to people for no obvious reason, including those with high net worth estate plans. “
These policies are strongly advertised to people over 50. Do you need it? No, if you have little debt and large assets; yes, if you are still building these assets and want to spare your loved ones the burden of covering your unpaid debts, end-of-life medical expenses and funeral expenses, in the event of sudden death.
When asked about this type of insurance, George Gagliardi, CFP at Coromandel Wealth Management in Lexington, Mass., Asked a good question: “Your children are not sources of income, so why do you have to insure them? He adds that life insurance for children is most often sold as term insurance, which has no cash value. Yet in this era of COVID-19 and the potential for future health problems, some parents have purchased whole life insurance for their children to ensure their insurability in the future. Although adults own these policies initially, they can be transferred to children later. Additionally, if COVID or its complications were to cost the child’s life, the payment can be used for medical bills as well as funeral expenses. Your financial planner may have more ideas on the subject.
Having disability insurance is a responsible act. But people often wear it longer than they should, observes Seth Benjamin Mullikin, CFP at Lattice Financial LLC in Charlotte, North Carolina. Because “this insurance only pays until age 65, the number of years you could take out of it” after an injury or disabling illness decreases over time. “A 35-year-old man paying the same premium could collect for 30 years; if you’re 62, you can collect them for just three.
A policy that will pay your mortgage payment if you can’t may seem reasonable, but these policies are limited in scope. Your loved ones won’t get any additional financial benefits like they would with a life insurance policy, which can also be less expensive. In addition, the older you get and the more you pay off your mortgage, the less you need this type of protection. However, the premiums will remain the same. “Life insurance will cover you or your spouse’s loss of income if one of you dies,” says Gagliardi. “This type of life insurance is mostly a scam.”