Over the years, I’ve kept a list of financial products that are complicated at best, and a waste of money at worst. Here are seven of them:
- Extended Warranties – I never begrudge the person trying to sell me an extended warranty. After all, it’s their job. After politely declining, I excitedly explain to them that I “self-insure all my appliances and electronics for when they need repair”. At which point their eyes glaze over and they’re glad to ring my purchase through. In short, skip these. Instead, buy reliable products and put what you would have spent on the warranty into your emergency fund instead.
- Payment Protection Insurance (PPI) – PPI is an insurance that will pay off a credit card, line of credit or loan if the holder dies, becomes disabled or ill, or loses their job. This type of insurance is expensive ($80/month or more is common) and notoriously hard to collect. People have paid thousands of dollars in premiums only to collect…nothing.
- Mortgage Insurance – Having mortgage insurance through your bank is better than not having any insurance at all. Again, the record isn’t great in terms of how easily claims are paid out. Not only that, but the value of your insurance decreases every time you pay down your mortgage. A better option is to have a separate Term Insurance policy – see below.
- The Wrong Kind of Life Insurance – Most of us will only ever need Term Life Insurance – a shorter term, simple and inexpensive life insurance that allows us to buy a hefty dose of it at a reasonable price. It’s good when you are younger, have debt and/or are raising a family. Other types of insurance such as Whole Life and Universal Life are suitable for more permanent insurance needs. They are also more expensive and pay higher commissions to advisors. I’ve never read a better article about life insurance than this one by Glenn Cooke. A good insurance broker will help you figure out how much insurance you need, and for how long, before they recommend a type of insurance.
- Index Linked GICs – On the surface, these sound great – investors can participate in the upside of the stock market, without risking their principal. Except there are limits on how much you can earn, your return may not include dividend payments, you can’t control when you sell the investment, and the fine print is literally 5 pages long. In fact, ATB Financial in Alberta simply doesn’t sell them due to the product’s lack of transparency. If you want to ‘try’ the market, buy a mix of GICs and conservative mutual funds instead.
- Group RESPs – You can buy three types of RESPs – Individual and Family RESPs (typically through your bank or investment advisor), and Group RESPs (typically through an organization that focuses on RESPs alone). Group RESPs are restrictive and expensive, and difficult to leave without paying steep fees.
- Segregated Funds – Segregated funds are a lot like Mutual Funds, but sold by the Life Insurance industry. They too limit the downside of investing in the market. That downside protection comes with a price – the fees on Segregated Funds are 0.5%-1.5% higher than your average mutual fund. There’s a case to be made for older people buying Seg Funds, but anyone else who wants to try out the market would probably be better off with a conservative mutual fund. If your advisor is suggesting them, ask them to justify their recommendation.
Feel passionately that any of these shouldn’t be on this list? Have any other ideas? Let me know, below!
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