Wednesday, March 21, 2012

There are a lot of items out there on the market that are blatant rip offs and people would never dream of spending their hard earned money on them, but there are other products that are not so clear and people end up wasting valuable income for decades.  One product in particular is life insurance.  Of course not all types of life insurance are rip offs, but there are a couple that stand out and they need to be avoided at all cost.  The first insurance is any policy that covers a child in the event of their death.  First and foremost any life insurance that is taken out should be for the sole purpose of replacing that person’s income in the event of their death.  God forbid that a child should pass away, but there is no income that needs to be replaced because children don’t contribute financially to the household.  Different companies push life insurance to parents by pointing out that not only will they receive a death benefit if the child passes away, but they also have the opportunity save money within the policy for college.  This policy sounds fantastic on the surface, but when you look closer it is a total RIP OFF!  I looked into one popular company and entered my son’s age which is four years old to see what kind of savings I would come away with when he turned eighteen and it was time for him to go to college.  The policy quoted if I put $51 in monthly for fourteen years I would come away with $10K in savings not including the death benefit.  $51 a month for fourteen years ends up being $8,666 by itself which means the savings only grew by $1,334.  How about a different option for that $51 a month?  Instead of putting it in this life insurance I will invest it in a mutual fund that averages 12% return on investment for the same fourteen years and instead of having $10K at the end I will have $22K!  I think that is a great return for my son’s college fund.  As you can see there truly is no need to take out life insurance on a child.

The next type of life insurance to avoid is Whole Life or Cash Value.  This is another life insurance which tries to convince people to save money within it, but also has a terrible return on investment.  Recently when I was upping my Term Life insurance the agent for the hundredth time tried to sell me Whole Life insurance on my four year old son.  Whole life is not needed for anyone no matter the age, but especially not a four year old.  I politely took the quote because I wanted to see exactly how much a rip off it really was.  The policy would cost me $306 a year for a $50K death benefit.  After forty years the policy would only have accumulated $12,240.  After FORTY years he only has $12K that is RIDICULOUS!  $306 a year comes out to be about $25 a month, so if I invested that same amount in a mutual fund with a 12% average rate of return for the same forty years at the age of 44 he would have over $294K!  So which do you think is the better offer?  On top of the terrible return on investment if you pass away before taking the cash value out, the insurance company gets to keep your money and they only pay your family the death benefit you signed up for.  Now that is a RIP OFF!

If you are in either one of these policies do you plan to get out?

Till next Wednesday!


  1. Thanks for taking the time to spell that stuff out. People don't want to think about the nitty gritty of things, they just want to believe that it's a good deal.

  2. Indeed! At my class on Tuesday there were so many parents with Whole Life on their children and they left the class upset that they had wasted so much money for so many years.