5 Financial Products You DON’T Need

As a personal finance expert I often get emails from readers asking for my opinion on financial products and services they are considering buying. There are many things that people buy that are a waste of money. Most of the time you don’t need those items at all or can find less costly or free alternatives.

Take a look at my list of the most unnecessary financial products and services. Knowing when to pass on products like these can save you hundreds and maybe even thousands of dollars a year.

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Employer Stock Plans

Didn’t your mother ever tell you not to put all your eggs in one basket? That saying has become the golden rule of the financial industry.  You’re already dependent on your employer for your livelihood and health benefits. It’s not a wise decision to depend on them for your retirement too. That’s too risky of a bet.

Just ask the employees of Washington Mutual. The 100 year old bank employed over 40,000 people and had just moved into swanky new offices in downtown Seattle in 2007.  Hundreds if not thousands of employees owned company stock through their 401(k) plans believing the company was stable and above failure. Little did they know the company had heavily leveraged themselves in subprime mortgages making it impossible for them to survive the credit crunch of 2008.  Ultimately the U.S. government declared the bank a failure making the stock worthless. Any employee, executive or otherwise, who owned shares of Washington Mutual stock saw their retirement wealth vanish.

Washington Mutual was not the first (Enron, Tribune Company, General Motors, etc.) and it certainly won’t be the last to fold and leave their employees hanging. Building a retirement portfolio that includes large chunks of your employers stock is the opposite of diversification. Minimize your risk by spreading out the types and companies you invest in. If a significant amount of your retirement portfolio is made up of stock from your current employer, sell off units of it until it is only one small part of your entire portfolio.

Life Insurance Policies for Children

We buy insurance as a protection against loss. Life insurance protects families against the loss of income by a family member who can no longer produce it. Unless your kid is Justin Bieber or supporting your household, life insurance for children is a waste of money.

Many parents who are in favor of life insurance policies for children argue that they would be unable to work and produce income if any of their children die.   While a loss of this magnitude would undoubtedly devastate any family many employers provide short term leave of absences during difficult times. When my grandmother died several years ago my aunt Ann was able to take a six week leave of absence, during which time she retained her health benefits and part of her salary. While she will never stop grieving over the loss of her mother she was able to function normally again, and return to work after a month and a half away.

A smarter money move is to establish a high yield savings account for them and open a college education savings plan such as a state sponsored 529 plan. Both moves are beneficial for parent and child.

Pay Day Loans

No matter how bleak your financial picture may look, payday loans are not the answer. They are advertised as easy and convenient ways to get cash between paydays, but what these lenders don’t tell you is how expensive these loans actually are.

Payday lenders make money off these short term loans in one of two ways, either as a percentage of the amount you borrow, like 10%, or as a set amount per $1 borrowed, like $15 for every $100 borrowed.  If you took out a 10-day $100 loan and were charged $15 for every $100 you borrowed your effective APR would be over 650%! That interest rate is many times higher than the late payments on even the worst credit card.

While many people see payday loans as their only way out, there are actually a number of less costly alternatives. While I would never recommend this normally, cash advances from credit cards are certainly less expensive than what many payday lenders charge in interest. Shop around for the best rates though.

Your best alternative is to establish an emergency fund for just such occasions. Begin by socking away any amount you feel comfortable each month, even if it’s just $25 a month. Over the next couple of months continue to build up a cash reserve to use when necessary. Your goal should be to build up enough money to cover your monthly expenses for six months to a year.

Collision Insurance on Older Vehicles

Collision insurance pays for damages caused to your car if it is involved in an accident. Owners of older vehicles in which the actual value of the car is low can benefit from dropping this add-on from their auto insurance policy.

When the cost of repairing damage to a vehicle would exceed the actual value of the car, insurance agencies will only pay you what your car is worth minus your deductible.

Most insurance companies charge up to $500 per year for collision insurance. If you vehicle is only worth $4,000 you have to ask yourself if it is really worth paying that much to insure each year. That’s nearly 13 percent of the car’s value.

If you are unsure of whether or not to drop collision insurance from your auto policy ask yourself this question: if a significant repair needed to be done to your vehicle, would that be the final push you need to replace it? If your answer is yes then you should drop the extra coverage.

Credit Card Unemployment Protection

Also known as payment protection and credit safeguard, this coverage promises to make or forgive your minimum monthly credit card payments for up to a year if you become unemployed, injured, disabled or pass away.

This type of insurance became extremely popular in the last few years when many Americans were afraid of losing their job. Credit card companies lured users in with free trial periods and easy enrollment.

While it may provide peace of mind for people worried about losing their jobs or who have long standing illnesses, for most people this safeguard is a bad idea. The monthly fees for this service average between $9.95 and $19.95 a month, which cost significantly more than they are worth.

Thankfully there are a number of less costly alternatives. First, check to make sure you don’t already have coverage in your life or disability insurance policies.

A completely free alternative is an emergency fund. Keeping enough cash on hand to make your minimum monthly credit card payments for six months to a year is a lot less expensive than paying someone else to do it for you.

This list is by no means a comprehensive list. There are many other complex financial products out there that may or may not be right for you and your family. Please do your own research before buying anything. The internet is a great resource in this instance. Continue to be skeptical about any offers you receive from financial institutions that seem too good to be true.

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Good luck!

Keeping Money in Your Pocket,

Nancy Patterson

4 Responses

  1. Justin Tollman

    While I agree with most of your rationale, I have to disagree with your stance on life insurance for children. I agree, the need for replacement income is not a good reason for life insurance on children. However, there are term life products for children that establish insurability, and that is the reason that we purchased life insurance on our kids. What happens if they become un-insurable prior to reaching the age of majority? We have a plan in place that is a stacked term policy, that can remain in place for 90 years. If everything in their life turns out peachy-keen, they can drop the policy and get a new policy that makes sense when they are old enough to make that decision. And unlike the $100 K whole-life policy that costs $1000 per year, our children have $250K of coverage for $150/year for the first 30.

  2. Paul Zietlow

    “A smarter money move is to establish a high yield savings account for them and open a college education savings plan such as a state sponsored 529 plan. Both moves are beneficial for parent and child.”
    Where are “high yield savings accounts”? Secondly, 529 plans get the same tax advantages of a life insurance policy, but when funds are used to pay for college, 50% of the funds are counted as income and increase the families expected contribution to college. That lowers the colleges financial support. Life insurance values are not counted against the colleges financial support. You may be better off to over fund a life insurance policy on a child at birth and withdraw funds when needed with no tax consequences. After graduation, the “grown child” could have a very nice life insurance policy with very inexpenses premiums.

  3. Omer hamid sirelkhatim

    For me I have gained new information

  4. Jacklynn

    You’ve got it in one. Couldn’t have put it better.


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