Personal Finance 

Top 10 Worst Financial Products Ever: Part One

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There are a lot of bad financial products out there. Some of them are downright punitively bad for you. While some financial products offer you great opportunities to build wealth, others can sap your wealth with high costs — and even keep you in the debt trap forever.

While some products aren’t always bad for everyone, many financial products are generally not a good idea for most people. Before you decide to take the plunge with a financial product, really think it through, and determine whether or not you are really make the best decision for your finances.

This post is kicking off a two part look at ten of the absolute worst financial products you could possibly get. We can argue over the order of these all day long but I think you’d be hard pressed to argue in favor of one of these products!

Here are 5 of the worst financial products. We’ll share the next five, who are even worse, products tomorrow!

10. Bank Accounts with Fees

Checking FeesOne of the biggest sources of discontent amongst consumers is rising bank fees. Bank accounts that come with fees erode your wealth. Meanwhile, banks are taking your money, and lending it out for a profit. They make money on your fees, and on interest lending your money gets for them. Look for fee-free accounts. At the very least, look for an account that waives fees if certain conditions are met.

9. Payment Protection Policies

Payment ProtectionYou rarely need these types of policies. These are plans that purport to cover your payments if you become unable. Credit cards are notorious for offering these types of policies. If you carry a balance on your credit card, you could pay quite a bit each month. These policies can be expensive, and they are known for making it difficult to get a payout, since there are so many exclusions. You’re better off building an emergency fund to deal with payment issues.

8. Department Store Credit Cards

Macy's Credit CardMany of the department store credit cards you see come with high interest rates. Few of them have rewards programs or perks. You can’t use them anywhere other than the one store. And, on top of that, when it comes to your credit score, department store cards aren’t seen as favorably as major credit cards from major issuers. You’re better off looking for a rewards card with a competitive interest rate from a major issuer.

7. High Fee Mutual Funds

Mutual Fund FeesMutual funds are attractive because they provide instant diversity (in many cases). However, not all mutual funds are created equal. There are high fee mutual funds, actively managed, that can sap your wealth. Some managed funds charge upward of 2% a year, as well as charging sales loads at the front end and the back end.

This doesn’t mean that all mutual funds are bad, though. The funds with high fees, though, will lower your returns dramatically over time. Check carefully for fees. There are plenty of low-cost index funds to choose from; these will give you diversity, but the fees are much lower.

6. Whole Life Insurance

Life InsuranceFor some people whole life insurance can be helpful — especially if it’s a big policy. Most of us, though, don’t need whole life insurance. Agents will try to hook you by pointing out that whole life policies build cash value. While this is true, most of us ordinary folks can’t afford the premiums on a whole life policy that would provide significant cash returns. Instead of spending your money on a whole life policy with meager cash returns, consider getting a much cheaper term life policy, and then use the difference in ways that are more likely to yield higher returns over time.

(Photo: kenteegardin, bark,stevendepolo, teegardin, mamchenkov)

{ 25 comments, please add your thoughts now! }

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25 Responses to “Top 10 Worst Financial Products Ever: Part One”

  1. AMP says:

    I’m not so sure I agree with the inclusion of whole life on here, for two major reasons.

    First, part of the reason whole life is so expensive is that the premium is meant to be paid over… your whole life. So it’s going to be higher when you’re younger to compensate for the increasing risk with the same premium later.

    Of course, term is the opposite. In comparison, it’s dirt cheap — during the original term period. However, if you become uninsurable during that period — hello, big C! – and you need to hang onto that policy after the term has expired, the rates will quickly become astronomical.

    Second, the cash value of these policies are protected against judgment creditors. Not as big a draw for the average Joe, I admit, but it’s still worth considering in our litigious society.

    • NateUVM says:

      I think that it probably depends on how you intend to use it.

      Term insurance is useful in that it covers you for a specific, uh, term. Say, to cover your income if you pass away while you are still paying a mortgage or raising children, etc… But once those liabilities clear (pay off house, children grow up and move out), there is no need to carry the same level of insurance, as an example. If that’s why you’re carrying insurance, then you are probably paying for more than you need with Whole Life.

      If your intent is to have an investment component, a lot of times, as Miranda mentions, you can acheive a much better return on your money by simply investing the difference in what the premiums are (between Term and Whole Life) in your own investment account(IRA, Roth or taxable). You can probably get a better return than you would get with most Whole Life policies (where the basis of performance can be nebulous, at best).

      You do mention the benefit of how Whole Life avoids judgements, etc… but then you also agree with Miranda’s point that it may not be for “ordinary folks” or “the average Joe.”

      You’re right. There is always a specific group of people in a specific financial situation for which a particular product will apply really well. But I have to agree with Miranda that there aren’t many that Whole Life works well for.

  2. freeby50 says:

    I don’t think department store cards are all bad.

    The Target credit card gives you 5% discount at Target which is a good deal.

    Also, I don’t know if its true in general but I think that department store credit cards can be easier to qualify for. That might be useful to build credit. When I was a teenager my mom got me a department store card in my name with a minimal $100 credit line. (that was decades ago) The point was to help me establish a credit rating.

    • Courtney says:

      Yeah, both of my store credit cards (Old Navy and Kohls) offer better perks on their store merchandise than any of my regular rewards credit cards. 5% rewards on purchases, free shipping, exclusive coupon codes for 15-30% off orders. And we never carry a balance on our cards, so we don’t care what the interest rates are.

      • Jon says:

        I wonder if this is just a method to caution shoppers that opening 10 lines of credit at different retailers is not the way to handle things.

    • Deb says:

      The 15% – 20% savings that are offered me, in addition to all markdowns and sales, when using a Macy’s Star Rewards credit card FAR and above beats the 1% that any other credit card offers me as a ‘reward’.
      I never maintain a balance so the APR% rate on the card is a moot point. In fact, one can use the card on a purchase AND then pay it off immediately at the same check-out, before the card even generates a mail-out ‘bill’.
      For savings oft times of a total of 75%-85% off when combined with sales, the rewards of the card can’t be beat ~ as long as one does Not pay a finance or late charge on the card.

    • WW says:

      You can get the 5% discount from Target by opening a Target debit card account that is tied to your bank account thereby eliminating any possibility of being charged interest or late fees.

  3. Payment protection policies are good if they have a signup and cancel period. Say, get $20 for signing up and you can cancel within 14 days. Deposit the check and at the same time mail a cancel letter. This was quite common to do back in 2005-ish when Chase sent out protection plan checks like crack.

  4. eastiesailor says:

    Agree with all!

    Anyone that defends whole life probably sells it. No one tells you that if your loved one cashes it in if you pass, the cash value goes away and they are paid on the face of the policy. Put that extra money into a mutual fund if you want to invest.

    Term is meant to protect you when you are most vulnerable (ie young kids at home, starting out, first 20 years of paying mortgage, etc).

    Credit cards are proven to make you spend at least 10% more than cash, plus fees, interest, etc.

    Payment protection policies have tons of disclaimers are expensive, etc.

    Thanks Jim for exposing these!

  5. Mike says:

    The inclusion of whole life, specifically dividend paying whole life, is based on utter ignorance of economics; the product’s combined internal and external values; how it can intereact with other financial actions to create a safe but high rate of return; how it provides multiple benefits with the same dollars saving costs elsewhere; and how it provides a safe money haven alternative to the bank’s minisucle .5% taxable. The article harms rather than helps consumers.

    • Dave says:

      I once sat down with an insurance salesman while staying at a rooming house. Since I was an engineer, he showed me an app he was working on to figure his commission and cash value. On a 40-year policy that he was figuring, no cash value accrued for the first 12 years. And the first five years premiums were practically all commission… then tapering off. Problem is that folks need a lot of insurance when they’re just starting out and if they choose whole life, they can’t afford much.

  6. huskervolleyball1 says:

    I agree that store cards are good when there are promotions for using their card. However,I had a ? about a purchase from the local Bon-Ton affiliate and my phone ? was never answered.

    Not sure if the purchase was worth the 20% off.

  7. gordono says:

    that is a myth regarding term life, most people do not have the discpline or knowledge to save money and invest succesfuly, so what happens is when the cheap term becomes expensive when they are old, they drop it and have neither an estate legacy through life insurance nor an equivalent investment portfolio

    • NateUVM says:

      Most term policies, at least the ones being lauded here, have level premiums throughout their effective term. Combined with inflation, that means the real premiums (along with the real benefit) actually decrease over the term of the policy.

      And it’s not a very good argument to suggest that, because people aren’t educated, they shouldn’t do what makes financial sense for their situation. Rather, the answer is to educate them!

  8. freeby50 says:

    It seems whenever you say that whole life is a bad idea some people come out to passionately defend it and attack people anyone who criticizes it. Like Eastiesailor suggested, one can only assume the people who argue how great whole life is are insurance salesmen who make large commissions selling it.

    FInancially Whole life is not just a ‘rip off’. Sure you can get a decent 3-6% guaranteed return. Thats not ‘bad’ per se. However theres all the negatives :
    – high comission costs (usually undisclosed)
    – high surrender fees and long surrender terms, what means if you want to cancel the policy within a year or two then you usually lose ALL your money. How is that good?
    – very high premium costs, most people don’t have $10,000 a year to put into insurance and most people would be better off investing their money in their own underfunded retirement funds and get straightforward tax benefits
    – high fee rates. Cash value insurance can be filled with high fees, especially ones which let you invest in stocks.
    – Complexity and lack of transparancy. Whole life is not simple and its hard to figure out all the details of how it works financially.
    – Guaranteed returns versus forecasted returns. Often whole life is sold based on forecasted returns due to dividend rates. Those are not guaranteed. You shouldn’t bank on that at all any more than assuming stocks will give 8-12% returns.
    – Most people simply don’t have a valid need for permanent insurance. Why have a big insurance policy when you’re retired? I’d rather have a big pile of cash.

    Of course not all whole life is awful. SOme is much better than others. Theres a spectrum and a wide variety of types out there.

    The 2 areas when I think whole life can make more sense is :
    – millionaires trying to avoid estate taxes
    – parents with developmentally disabled children

    The VAST majority of people are better off avoiding whole life.

    • JoeTaxpayer says:

      Agreed, nice list you offered here.
      I was never a fan of mixing insurance and one’s investments. As Miranda suggested, my wife and I have term, and it’s due to end near the time we retire. After retirement, there’s no need to leave a windfall for each other or for our daughter. Even with a bad last decade, our return over our investing lifetime has far exceeded what life insurance would have yielded.
      I’d put these products high on the list, I wonder what Miranda has in store for us tomorrow.

      • Bob says:

        I agree with you, Joe – freeby did post a nice list. It’s a list largely consisting of misconceptions about whole life but it is nice. To whit:

        – freeby’s first four points are basically, “high commissions, high fees, high premiums and high fees,” to which I’d reply, “relative to what?” How high are the “commissions” a toaster-oven salesman makes? I dunno. If a good waiter earns $100k by getting a 20% “commission” added onto freeby’s annual dinner tabs, is she overpaid? If an investor’s objective is “avoid paying anyone for advice,” ANY and ALL commissions are “high.”

        – Whole life (WL) does not have “surrender charges” – universal life and annuities do – but let’s look at how the “high commissions, fees and premiums” of WL effect an outcome, in real life, instead of in hyperbole and folklore:

        Assume a 40 y/o male, non-smoker wanted to “invest” $100k in (insured) WL instead of in insured 1.80% 5-year CDs for his “safe money” (not in place of his “mutual fund money”). He’d have the following consequence, if his advisor knows what he’s doing:

        One-time investment: $100,000
        Immediate death benefit: $406,000
        Guaranteed Cash Surrender Value (CSV), end Year 2: $102,615
        CSV, end Yr 10, @ Guaranteed MINIMUM dividend: $142,738.

        To protect his family with $400k if he dies during the same ten-year period, he’d pay $425 annually, or $4,250 total, for “cheap” term. His CDs – if he can roll them over for a second five-years at 1.8% – would earn him $119,530 less the $4,250 he spent on term life. Net results:

        “Expensive, high commission” WL: $142,738
        “Smart, buy-term-invest-the-difference:” $115,280.
        What a rip-off the WL is! It outperforms by only 23%! Should be illegal.

        Focusing only on the guaranteed aspect, we’d have to assume that the man pays $475/year for Years 2-10 and that the carrier raised rates to the maximum allowable. Net CSV would reduce to $136,620, a $21,000 outperformance over CDs/term. Was this analysis “complex” or opaque?

        • NateUVM says:

          Bob, a 40 year-old w/ $100k sitting around ready to invest? How much of the population did you just exclude with that hypothetical? 90%? 95%? 99%?

          So, point made Bob… Whole Life is NOT for everyone. I’d be curious to see a comparison where monthly premiums were paid on BOTH types of insurance (Term vs. WL).

  9. What are the top 5? I could only view 6-10…

    Mahalo, interesting article.

  10. cosmo says:

    Have never used any of these junk items before, and never will.

    Too bad others do, though.

    Cosmo (richer and wiser)

  11. Jamie moore says:

    I am a Northwester Mutual representative for 18 years. I have a whole life policy that the cash value has beaten the number one American Fund for the past 15 years. When you buy the leader that has the best expense ration, lowest morality and lowest lapse ratio the performance is never in question. You lack of knowledge about my industry is a joke. Do your research about the best. Most companies are poorly managed so the product does not perform but to say all whole is bad is just wrong. I can go on and on about the other benefits but as a consumer most people just want to hear the negative part.

    • NateUVM says:

      I don’t think that any (or very few) of the people that are being critical of whole life are saying that ALL policies are bad, or that there is NO ONE that would benefit from opening them. Usually, there is always going to be a person (or group of people) for which a particular financial product makes a lot of sense. The key is finding that match.

      One of the main problems with whole life is that it is sometimes very difficult to understand thouroughly, and is therefore difficult to truly compare it to alternative investment options. Even those that have supported whole life here have suggested that a lot of the rancor against the product is due to ignorance/naivete.

      One of the selling points of a financial product should be ease of understanding, that it is NOT a good thing to be difficult to see how it might benefit you (or what the pitfalls might be).

  12. Christy says:

    I agree that not all store charge cards are bad. Talbots has a birthday program where you get a 10-15% discount (on top of other sale discounts too if desired) for all your purchases for one day during your birthday month. You earn points on everything you purchase that cash out to dividend coupons for discounts on subsequent purchases. They have huge sales at end of Dec/Jan and July where you can get great bargains. All their clothes lines in a given year use same shades of colors so it makes mix and match pieces to get more mileage out of your wardrobe a breeze. I never carry a balance so interest rate does not matter to me. I never shop anywhere else for clothes since the rewards are so excellent. I make a game out of seeing how many pieces I can get for the least about of money. This is my favorite credit card.

  13. Bob says:

    Substitute “private student loans” for “whole life” and you’ll have a better list.

    There are zero “surrender charges” on a whole life policy – it’s universal life that has surrender charges – and if one holds it for 15-25 years, far more cash value will have accrued than total premiums paid. Oh, and there is a fairly high level of certainty that policyholders will one day die, perhaps even before they intended to! Term life owners, on the other hand, rarely die during the term of their policies (> 98% of term policies never pay a claim), rendering 100% of the (lower) term payments a total waste of money.

    No one with a shred of credibility – or brains – would try to argue that whole life is a suitable REPLACEMENT for other investments just as no one with a brain would suggest that 100% of investable assets should be in stocks, bonds or other mutual funds. As a foundational, safe money investment, whole life – and particularly over-funded whole life – makes enormous sense: My policy is earning over 4% cash-on-cash, I can access my insured principal – which can never decline in value – at anytime, and retirement withdrawals will be tax-free, not “tax-deferred.”

    A close inspection of private student loans, something disorganized, distracted parents (i.e. “cosigners”) never do, reveal them to be a future crushing financial debt – they are ALL variable, even the “fixed rate” ones – and no one who uses them has even the foggiest idea how much college will
    actually end up costing.

    Come to think of it, add “paying $50k+/year for a college major with little future employment prospects (think “gender studies,” “Spanish Inquisition History”)” to the list of terrible financial products/mistakes, too!

  14. Gene A says:

    As an insurance PROFESSIONAL (and not a peddler) who has almost 3 decades of financial industry experience. lets set the record straight:
    1. Most of my clients have bought inexpensive term insurance policies from me.
    2. In the long run, the net cost of whole life is less than that of term insurance.
    3. Whole life is not a ‘rip off’ but its not an investment either, its insurance, which is paid tax free upon the demise of the insured. The fact that it provides a cash value is icing on the cake. The returns on whole life beat every other “safe” investment out there.
    4. The commissions paid to the salesperson do not have a significant impact on the premium paid by the consumer. Other expenses of the issuing company, along with interest rates and mortality costs are more significant factors. Further when you go to purchase a new car, a suit or an expensive handbag do you concern yourself with how much the salesperson is being paid? NO
    5. I always explain to clients that whole life is a commitment, and that if there’s any possibility that the policy will be surrendered that it will not be in their best interest
    6. You don’t need spend anything close to $10,000 a year for whole life to make sense if the policy if properly structured. All you probably need is the same amount of money you might spend each month on lunch/dining out for the month.
    7. Yes insurance can be complex but its very transparent if someone is willing to READ and take the time to work with a competent advisor and be educated.
    8. While dividend payouts used to project policy cash values are not guaranteed, it important to select a financially stable insurer (preferably one that is mutually owned) that has a consistent dividend track record.
    9. Monies accumulated by investing can be gone tomorrow by lawsuit, business failure, market downturns, elder abuse, a long-term health event, etc. so as previously pointed out, insurance is the only guaranteed way to cover final expenses or to pass wealth to the next generation.
    10. We’re all going to die someday. Is your plan to pay for your own burial or to have your kids pay for it?

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