Sunday, November 7, 2010

Financial Products to Avoid

By Ray Martin Nov 4, 2010

The financial industry sells a lot of products that most folks should just avoid. Often these products are high cost versions of the same product available at a lower cost, offer a benefit you simply don’t need or expose you to additional risks. In short, they are a waste of your money. Here are three of the worst offenders.

Life insurance policies on children: Life insurance should cover people on whom others are financially dependent. In other words, you should buy life insurance on the family breadwinners but not on the people who are dependent on them. Since you don’t rely on your young children for income, you don’t need a large death benefit if they die. Insurance companies make a lot of money on a child’s policy because it’s pretty unlikely that the policy will ever be collected. Although it’s heavily marketed, this product is not as heavily bought. The American Council of Life Insurers reports that only about 15 percent of children in the U.S. under the age of 18 are currently covered by life insurance with policies generally providing only a few thousand dollars in coverage.

Grandparents in particular seem to like giving life insurance policies as gifts to grandchildren. I encourage them to put money into a 529 education account instead.

Co-signed credit cards: Under the new credit card rules, anyone under 21 can’t get a credit card unless they have sufficient income OR some over age 21 agrees to co-sign on the account. Unfortunately there are many loopholes so this restriction is unlikly to stop younger folks from getting theier own credit cards.

You should NEVER agree to be a co-signer on anyone’s credit card. Yes folks, that means you should never co-sign a credit card for your kids or siblings. Co-signing puts your own credit score on the line. For instance, if the other person on the account is late with a payment, that will reflect negatively on your credit report and that could lower your credit score. For parents with kids in college, instead of using a co-signed card, consider using a prepaid or bank credit card or a debit card.

Mutual funds that charge sales commission: These are called LOAD mutual funds. Sales charges on the front-end take four to six percent of your initial investment off the top to pay this sales charge. Funds with deferred sales charges (called back-end or deferred sales charges) come with additional ongoing fees that eat away at the fund’s performance while you own it. These load mutual funds will then need to outperform no-load mutual funds to make up for their extra fees. There’s not much to support that load funds sold by brokers can outperform no-load funds.

Companies say that sales commissions on mutual funds are a fee you pay in exchange for advice from a financial advisor. If you’re looking for investment advice, find an advisor that charges a fee for their advice, and then ask them to recommend no-load funds where your purchase of any funds recommended does not result in any additional compensation for the advisor.


1 comment:

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