Life insurance is not one of the easiest products to understand, but getting the hang of it isn’t as difficult as most people believe. To compound the innate reluctance, there are more than a few misconceptions floating around when it comes to undertanding this arm of the insurance product spectrum.
Myth #1: I’ve never been married and have no children, so I don’t need any life insurance coverage.
This is one of the most common misconceptions about life insurance. People need at least basic life insurance to cover personal debt, hospital and burial bills. In the event of death, uninsured people leave their expenses with their family to deal with, which can potentially place them with a financial burden. Additionally, with life insurance intact, you can dedicate an amount to a
favored charity or other worthy cause. The other sad truth is that when you do pass, someone is going to have to float the bill as well as possibly take care of some other expenses you owed as well. Even if you set aside some money in a will or trust to pass on after death, that money could end up greatly
taxed, be prolonged, and not be enough to cover final expenses. If you have hundreds of thousands of dollars to ‘gift’ someone or feel like checking out the costs of final expenses and updating that gift according to current costs annually, you may not want coverage. Even if you did vow to re-calculate final
expenses and other costs you may leave behind, it’s very easy to fail at living up to that promise. Life insurance is a simpler, efficient, and less time consuming process.
Myth #2: My life insurance only has to equal twice my yearly salary.
You should have an amount that equals what is actually required to cover final expenses, as well as enough to adequately cover the costs of living for your family or anyone else dependent on your income. After deducting medical bills and burial expenses, there may be additional debts to consider such as the mortgage on your home. A thorough cash flow analysis can estimate more accurately the amount you need.
Myth #3: My work provides adequate life insurance coverage.
If you are single and do not live above your means, your employer may provide enough life insurance coverage. If you are married with children, however, added coverage may be necessary if your employer’s coverage isn’t enough to cover the anticipated projections you’ve calculated for your family’s future.
Myth #4: Premiums are tax deductible.
A common misperception– unless you have your own small business, the cost of personal life is never deducted.
Myth #5: It is always advisable to purchase term life coverage and invest the difference.
This is not necessarily true. Since the cost of term life coverage can increase substantially over time, it is usually better to consider permanent coverage. The additional risk of non-insurability down the road could also lead to even more problems, such as estate tax issues. Permanent coverage leaves you covered until your death with less worry and hassles.
Myth #6: Variable over straight policies always.
Variable universal life (VUL) policies have a range of fees which relate to the insurance and securities elements of the policy. As a result, if the sub-accounts perform sub-par, the policyholder will likely see a lower cash value than a person using only a straight universal policy. In a particularly volatile or weak marketplace, more premiums may be paid in an effort to keep the policy in action.
Myth #7: Only those that earn money towards the household require life insurance.
Another large misconception. Absolutely not. Let’s face it, the modern homemaker is more akin to a business manager, juggling the demands of spouse, children. You would absolutely insure a business partner. The future is unpredictable, even for two income households, the surviving spouse or dependent would still be suffering a loss of income upon the other’s passing, regardless of who earns the highest income.
Myth #8: Return-of-premium (ROP) should accompany every term policy.
There are varying levels of ROP riders. Some planners insist on them while other say to avoid
them. Depending on the risk involved in your personal case, you may want to consider it. Riders can be
beneficial to streamlining your policy to your personal needs.
Myth #9: Just save your money and forget life insurance.
This is definitely a no on all fronts. It’s probably the most common mistake of most peoplewhen it comes to insurance. You
should always have life insurance of some sort. If the time comes that you become a millionaire on
paper, you can re-consider whether or not you want to continue your policy. If you choose not to
maintain your policy, you run the risk of depending only on your investments, which is a big gamble.
If your investments fall through or if you lost all assets, liquid or otherwise, and opted not to carry
coverage, you could suddenly be denied coverage entirely due to the lapse. With every year, life
insurance premiums also increase, so if you go without coverage for years because of your financial
status and are suddenly without any assets, you’d be looking at even higher premiums due to the time that has passed. Thorough research should be done before drastic measures such as these are taken.
-Desiree Baughman, InsuranceQuotes.org, @DesireeBaughman