Having life insurance, either through an employer or an individual purchase, is not topic adults enjoy discussing. After all, life insurance is really death insurance and death remains a taboo concept in American culture. Since life insurance doesn’t come up often in conversations, it’s no surprise that many myths have sprouted up about it. Here are eight of the most common myths that you should know.
Myth 1: Life insurance is too complex for me to understand.
Actually for most people’s needs and budgets the decision boils down to term versus whole life. It really is that simple.
Term, payable upon death only for the face amount of the policy, is purchased for the amount of time coverage is wanted, at significantly lower the cost of whole life. Because of the affordability, holders tend to be able to keep up with the premiums even in hard times, thus not risking dying with no funds to provide for those they love. For someone with a limited monthly budget, this could be the way to go.
Whole Life, which consists of both coverage and an investment vehicle, is an expensive purchase because of that investment component. It can be appropriate for sophisticated people with complex financial needs, such as for estate planning. However it does not tend to build significant cash value until it’s been held for about 12 years or more. Before that, if you can no longer afford it and surrender it prior to that time period, the cash value may be small. In addition, since the holder might have aged, the cost of replacing the coverage with a term policy may be unaffordable.
(Also read: Basic Things To Know Before Buying Life Insurance.)
Myth 2: I will buy term insurance and invest the money which whole life would have cost me in my own way.
The reality is that whole life insurance comes in many forms, including the specific investment options. Those forms and options would not remain marketable if they did not fill some customers’ needs and provide returns on investments which meet or exceed customer expectations.
Investing is a complex decision, with no absolute right or wrong answers, and which also involves careful selection of an advisor. Regarding the latter, you have to shop around, finding out about the brokers’ track record for investment results, any complaints filed against them, the commission rate and any “hidden” fees and how comfortable you feel about trusting them.
You can find help with your “due diligence” through the free website insure.com which provides standard and poor’s ratings and detailed reports of insurance companies.
Myth 3: I don’t mind the cost since it’s tax deductible.
The premiums for personal life insurance cannot be written off for tax purposes, at least not according to the current tax code. For the self-employed, they are deductible if the coverage is for protection of the business assets for the owner.
Myth 4: I am too young to worry about life insurance.
Obviously, given that life is full of uncertainties, no one, including youth, can predict when death will occur. But the more important financial issue is that purchasing term insurance is a low cost when you are young and healthy. In a sense, that is almost “free” coverage.
In addition, there is the altruistic point of view that your loved ones would realize a financial gain from their loss of you upon your death. Although that likely will not eliminate their grief, it is a “gift’ you can arrange to give them.
Myth 5: I am fully covered at work.
Insurance provided by employers usually ends with the end of employment, which occurs all too often in this volatile economy. That means that, unless the employer allows you to continue the policy and pay the premiums yourself, you are going to have to start from scratch in purchasing coverage. You might be doing that at age 50, when the cost of premiums shoots up.
Another reality about employer-provided insurance is that usually the coverage is for double your annual compensation. That might not be enough. For example, there might be a high mortgage payment, education of children, estate taxes and a stay-at-home spouse without marketable skills to factor in. At the very least, the amount of coverage should be adequate to float a household for several years. At the most it should be enough to guarantee the dependents their current lifestyle.
It’s in you and your family’s best interest to do the math. If your annual income is $75,000, therefore your family will receive $150,000. That will not go very far if you intend for your family to maintain a middle class standard of living.
Myth 6: I’m single, with no dependents, so I don’t need any coverage.
No one knows the future and the single might marry, acquire dependents, want to provide for the care of pets or leave money to charity. The younger the purchase is made, the lower the cost and policies can be upgraded if your situation changes.
In addition, there are the costs associated with all deaths, whether single or married. For example, what social security provides rarely covers the burial expense. Those without savings have to consider these end-of-life services and who will be paid to perform them.
Myth 7: I don’t bring in any income into the household so why cover me?
The stay-at-home spouse’s services might include childcare, nursing during sickness, housecleaning, meal preparation, shopping, running errands such as bringing in the car for repairs and more. The expense of replacing just some of them usually shocks breadwinners. That’s why breadwinners must research those costs in order to calculate how much coverage for the stay-at-home spouse will need in order for the household to continue to function.
Myth 8: I need insurance so my family isn’t stuck paying off my credit cards and student loans.
Many debts such as credit card balances and student loans die when the person does. The exception is if others co-signed for the credit cards or student loans and therefore are responsible.
America has a relatively high cost of living compared to that of nations such as much of Mexico, Costa Rica, Spain, Bulgaria, Italy and Ecuador. That’s why life insurance might be considered a personal finance necessity in America. No one wants their loved ones to experience a severe economic reversal when they die. Since the cost of coverage rises with age and is not easily available to those with chronic health conditions, it is a good bet to buy it when young and healthy and keep paying the premiums, even in tough economic times.