Do you really need life insurance for children?
Learning about insurance policies may seem about as exciting as a graduation speech, a trip to the DMV and the color beige. However, if you don't do your homework, you could get convinced to buy policies you don't need -- costing yourself a small fortune.
Many types of insurance policies simply don't make sense for folks either because they're redundant, they solve a problem that really isn't a problem or for other reasons.
Here's a list of five insurance types you could likely do without:
1. Life Insurance for Children
What it is: If a child dies, it will pay the parent an indemnity.
Why you don't need it: People buy life insurance to provide for their dependents, so it makes little sense to take out an insurance policy for kids -- since they have no dependents. According to the U.S. Health Resources and Services Administration, the death rate for children in 2010 aged 1 to 4 was 26.1 per 100,000 children. For kids aged 5 to 14, it was even lower, at 13.9 per 100,000. Both of those numbers are extremely low, meaning that even if you decided that it was a good idea to get life insurance for a child, the likelihood of the insurance ever being used is quite small.
2. Mortgage Life Insurance
What it is: It pays the remainder of your mortgage if you die.
Why you don't need it: For starters, the money goes to a lending company and not your dependents. Secondly, the premiums for mortgage life insurance are hefty. According to Readers Digest, mortgage life insurance is typically between two and three times more expensive than term life insurance.
It is better to simply have enough term life insurance to take care of your family after you're gone. If they choose to pay off the remainder of the mortgage with that money, they can, but with term life insurance, they wouldn't have to. If other needs were more pressing, they could put the insurance money toward that. Mortgage life insurance wouldn't give that option.
Also, if you've paid off your home before you die, you will have paid for this insurance for years and your family will have nothing to show.
3. Credit Card Insurance
What it is: In the event a cardholder dies, becomes disabled or is involuntarily unemployed and cannot pay their credit card bill, this coverage will kick in and -- depending on the coverage -- will either pay the bill in full or make minimum payments.
Why you don't need it: According to Consumer Reports, the coverage is expensive compared to life insurance and may deny claims of disability for pre-existing conditions or for not being "totally disabled" as some policies define. Having life insurance or disability insurance, both of which could be used to pay down credit card debt, is a much better choice than credit card insurance. A person would also be much better served by saving their money and paying down debt altogether.
4. Accidental Death or Dismemberment
What it is: If the insured dies or is dismembered due to an accident, the policy pays benefits. In the case of death, these benefits are paid in addition to life insurance.
Why you don't need it: Accidents do happen. In fact, accidents and unintentional injury are the fifth leading cause of death in the United States, according to the Centers For Disease Control. However, if an accident happens because of a car wreck, fire or at work, they are covered under other policies. If a person dies because of an accident, life insurance covers their family. Simply put, accidental death or dismemberment insurance is cheap but redundant.
5. Specific Disease Insurance
What it is: A specific policy to cover the costs of cancer, heart disease or other diseases.
Why you don't need it: If you get sick with something other than the disease you are insured for, you are out of luck. Additionally, these policies often include stipulations that say they won't cover other illnesses or causes of death that are related to the disease, such as infections or pneumonia. Some will only cover specific parts of treatment, while others will only pay fixed dollar amounts or will limit the payouts. It is better to get insurance that covers any disease.
The Investing Answer: A wise investor eliminates as many extraneous monthly payments as possible so they can put their money to work. Insurance is bad-luck lottery: it only pays in the worst-case scenario. Yet, there is a reason insurance companies are profitable. Actuaries crunch the numbers to insure the company brings in more than it pays out, and these unnecessary policies are a huge cash cow for the companies since they rarely pay out, which means more often than not, you lose out.
Check every insurance policy you have today to see if you have unnecessary coverage and either transfer payments to term life or invest the money elsewhere
- By Brian Reed