Rip-Off or a Good Investment?

It seems nearly impossible to avoid the bombardment of ads and commercials with new products and services being touted our way. Whether we are scouring the Internet, watching television, or even at a sporting event, we are being marketed to on a daily basis. It can be overwhelming and in my opinion, very annoying. Being a conscious consumer and not getting tempted by the latest and greatest gadget or service can be a difficult feat.

Something that makes our lives easier (or at least gives the impression it will) can be difficult to turn away. But, how do we know it will actually benefit us? Marketing tactics have gotten good. I mean really good. So, it’s hard to blame anyone who falls for a product or service that seems so cool, convenient, and credible.

As a financial planner, I get worked up when I see consumers being misled by financial products and services being marketed as “one size fits all” and only the best features are highlighted. Depending on your situation, it may not only be unnecessary, but it could even hurt your situation. Sometimes salespeople receive high commissions and other incentives, so there is little motivation to ensure you get a suitable product.

Below I list a few of the products I’ve seen advertised or gotten questions about and in turn, done some research into who they may (or may not) benefit. Keep in mind these are based on my opinion and nothing here should be construed as financial advice. As mentioned, everyone’s situation varies and speaking to a fee-only financial planner who is a fiduciary can help you choose what might be best.

Annuities

An annuity, in its simplest form, is a financial product that allows you to contribute a set amount of money in order to receive a lifetime income stream in return, similar to a pension. There are many types of annuities and they can be quite complicated and difficult to understand. Many times they are marketed to employees who already have a solid pension, and therefore adding another fixed stream of income may not make sense. In particular, for those who do not have other investments to help offset a large fixed income allocation. Fixed income (set monthly payments) is more susceptible to higher inflation. Investing in the stock market via a 401k or IRA can help offset some of that risk. In addition, these accounts are notorious for high fees and long surrender (lock-up) periods, so do your research before purchasing.

Child/Baby Life Insurance

Life insurance provides a lump sum cash benefit for those who rely on you for financial support when you pass away. The key is “those who rely on you for financial support.” Life insurance should not be marketed any other way. Losing a child is a devastating and traumatic event for any parent, but the main pitch is that it will bring financial relief. You will probably not need financial relief as much as you will need sympathy, care, love, and support; none of which you can put a price tag. Money would be better spent insuring one or both parents.

Extended Warranties

An extended warranty is additional coverage you can purchase past the manufacturer’s warranty. They are typically offered with cars, appliances, jewelry, electronics, and literally anything we buy on Amazon (when did this start?!). Are they worth it? It depends, of course. For example, I bought a lifetime warranty on my wedding ring that I have gotten back much more than I paid. I’ve lost a few diamonds, had to replace the entire ring (see: lost diamonds), and twice per year I have it refurbished to keep it looking sparkly. It’s important to read between the lines and calculate the cost of the warranty vs. replacing or fixing it. Will you want the same TV brand in 10 years? Maybe not. How about that car model? Technology changes often, so consider your habits. Many times, the manufacturer’s warranty will do.

Buy Now, Pay Later

Buy now, pay later allows a consumer to make a purchase and pay it over time, rather than in one lump sum. Many times, they are offered interest free, but any missed payment could trigger both interest and fees. These have become quite popular over the past few years. It seems their popularity has gained with soaring inflation and consumer spending slowing down. No better way to get consumers to still buy things they don’t need! If you are sure you can pay it off in the time allotted, an interest free loan can be helpful in situations when funds are not yet available and there is an immediate need.

Permanent Life Insurance

Permanent life insurance provides protection throughout your entire life and includes a savings component. Upon your death, like all policies, it pays a death benefit to your beneficiaries. In contrast, a term life insurance policy must be bought for a specific time period and does not build any cash value. Whole life and universal life are two examples of permanent life insurance. Term policies are less expensive and most folks will be good with term. Insurance salespeople will sometimes sell the savings component of a permanent policy as an investment. Let’s be clear: insurance is not an investment. Insurance is meant to make you or your loved ones whole if the unexpected occurs. When evaluating insurance products, be sure you speak to a trusted licensed insurance agent. Know the reasons why you are purchasing life insurance and an idea of how much you may need. Ask questions, particularly around conflicts of interest and how the person is compensated. Some agents are paid a commission to sell you a more expensive policy that may not be suitable.

Prepaid Maintenance Plan

A prepaid maintenance plan provides extended service coverage for your vehicle past its manufacturer’s warranty. I would describe these plans as a hybrid warranty/insurance policy for your automobile. I liken it to insurance because you pay for this service, but may never use it. It is for this reason that I do not believe these plans are beneficial for most consumers. If you are concerned about your car breaking down or needing to replace the timing belt, you may be better off putting the “would be” payment into a savings account. That way, if you don’t use it, the money is still yours. And bonus, it’s earning some interest!

We will continue to be hounded by fancy new products and services that promise to save us time and money. As always, be wary of something that sounds too good to be true and do your homework before purchasing. Speak to a financial planner who understands your situation and can help you make informed decisions when evaluating financial products. Bottom Line: do no let yourself be talked into buying something if you are not fully aware of the advantages AND the disadvantages.