Response to 4 Life Insurance Policies You Should Never Buy

Neal Frankle (a CFP) wrote an article for U.S. News in July of 2012 giving four types of policies that he thinks you should never buy.

The four are:

1. Guaranteed Issue
2. Life Insurance for Children
3. Travel Insurance
4. Whole/Universal Life Insurance

While I'm not a big fan of numbers 1 and 3, there are reason to buy at least three of four types of insurance at certain times.  So, let me outline a couple of things about insurance, in general.

First, you buy insurance for a couple of reasons, but the main reason is to protect against risk.  Different people value risk differently.  You can look at the math, but the fact is that if someone says you have a 20% chance of dying before age 80, and you want or think you might need to be insured until age 80, then you are taking your chances if you don't purchase life insurance that extends that far.  This is the same with any type of insurance.  For example, who needs an umbrella policy?  Who needs a disability policy? 

Second, you buy insurance for risks that you cannot afford to pay out of pocket.  You buy life insurance because almost no one has enough savings to make up for the lost income of a spouse, especially if it is the working spouse in a one income family. 

So, let's get to the specific types discussed by Mr. Frankle. 

1. Guaranteed issue - With guaranteed issue insurance rates are high.  Why?  It's because everyone, regardless of health or other risks, can get it.  Therefore, rates are high.  Who would buy this insurance?  The people who would buy this insurance are people in high risk categories who are otherwise uninsurable, but who need insurance.  It's not that I think everyone should consider it--far from it.  I do think that if you've applied for life insurance and been denied or been put in a high rate class, then you should consider it, but always compare.  Also, make sure you compare to a good and dedicated life insurance company.  Do not buy life insurance through a company that specializes in home and auto.  The rates will be high. 

2. Life insurance for children - I presume that Mr. Frankle is not talking about whole life as he doesn't think that anyone should ever purchase whole life.  So, yes, it is stupid to purchase a term life insurance policy for a child.  However, if you have the cash available, there are many reasons to buy a policy on a child or a grandchild.  Leaving a legacy in a non-taxable account is a great idea for some people. 

3. Travel insurance - Mr. Frankle has some good logic here.  If you have life insurance, you have life insurance.  The only time that I might even think this is a wise choice is if you do not have any life insurance and you are leaving for a trip that could be dangerous.  However, if it only covers you while on your flight, then it's pretty useless.  The number of times a plane goes down is far lower than the chances of dying in a car accident.

4. Whole\Universal life - I am not a big fan of universal life.  Whole life, on the other hand, can be structured to reduce fees and commissions and have a reasonable interest rate.  Mr. Frankle bases his opinion on the fact that he has been a CFP for twenty nine years.  One thing he does not say is that the CFP program is biased against whole life insurance.  He says that he has never seen a policy that pays off and that the fees eat up all of the interest.  I do not know how many policies he has looked at, but it could not have been many.  I haven't looked at many bad policies, but the ones that I've sold and recommend have internal rates of return in the 3.7% to 4% range over time.  That is a tax-free rate of return equivalent to about 4.7% to 6.5% depending on your tax bracket.  The guaranteed rate is a little lower, but it's a guaranteed rate.  Given that money markets range from about .3% now to about 2% in good years, I'd say that a whole life policy is a great idea for many people.  That's just the savings piece.  That doesn't even consider that you still have some life insurance in force.

There are many ways to buy insurance.  Term life insurance can be great, especially when coupled with a whole life policy.  Many people need life insurance longer than they had thought.  That's especially true now with people having to wait longer to retire due to the poor stock market returns over the past fifteen years. 

Of course, my main point was simply to dispel the idea that there is no place for the insurance policies listed by Mr. Frankle.  I think it's pretty obvious that for some people all of these policies can be useful, even if some of them are not as useful as others.