Almost nobody wants to think about life insurance. The terminology can be confusing and it seems like it’s hard to know what to do when it comes to buying life insurance. Debunking the myths about life insurance is a good start to understanding what life insurance is, why you need it and how much you need.
Myth #1: Only people with dependents need life insurance. One goal of life insurance is to protect one’s spouse and children by replacing your income if you should die. But even an unmarried person will have debts, funeral expenses and other bills that will need to be settled. The proceeds from life insurance can also be used as a legacy gift to a charity or relative as your legacy.
Myth #2: Life insurance through employment is enough life insurance. If you have no dependents and not many outstanding debts then that coverage may be sufficient. However if you become ill and lose your job you also lose your life insurance and you may not be able to qualify for an individual life insurance policy if you have certain health conditions.
Myth #3: Life insurance if for when you are old, so it’s okay to ignore it for now. No one wants to think about death or what might happen to their family if they weren’t there but if you can see it as a way to ensure your dependents are taken care of, it gives you one less thing to be worry about.
Myth #4: All life insurance policies are the same. You need to read the details of the policy because there are details that will vary from one insurer to another. One item to look at is the limitations of the policy. There may be a waiting period after you buy the policy before benefits can be claimed. There may also be exclusions for suicide, acts of war, or on the job death.
Myth #5: Buying life insurance is too much trouble. You can easily get online quotes for life insurance. You can also ask for quotes from an insurance agent and make the comparisons easily enough. Also this is a process that you only have to do once for a policy that will last for years.
Myth #6: If my spouse isn’t employed they don’t need life insurance. Your spouse would have funeral expenses or debts to be repaid. Also, you should consider what would happen if you spouse were not there to run the household or care for the children. You would need to have the resources to get assistance with those duties. Also, you might want to the option to take time off to be with your children or settle your spouse’s affairs. The proceeds from life insurance could be very helpful in a stressful time.
Myth #7: It is best to name your estate as your beneficiary. You should consult your accountant and attorney about your specific circumstances. But in general if the estate is the beneficiary then the life insurance proceeds must go through probate. This process can take months to resolve and could increase the estate taxes that must be paid.
Myth #8: Term life insurance is always a smarter choice than permanent life insurance. It’s true that term life can be less expensive than permanent life policies. But a permanent life insurance policy can be beneficial if it is also used as an investment tool. One permanent life insurance plan is universal life which allows you to vary the premiums you pay in a year. This is good for someone with a fluctuating income. Also you can borrow against a permanent life insurance policy and withdrawals of the principal are tax free. Because of upfront fees it should be a policy you plan to keep for at least 20 years.
Myth #9: Life insurance is too expensive. Life insurance is less expensive the younger that you are. So it is a good idea to get a policy that is renewable at a younger age while you are in good health. But almost anyone can find a basic policy that fits their needs if they do some comparison shopping.
Myth #10: Everyone needs to have life insurance. Each person’s situation should be individually evaluated. If you have no dependents and enough resources and assets then life insurance might not be necessary. But you should be sure that you have adequate health insurance and long term care insurance so you don’t have unpaid medical bills that would need to be settled once you are gone.
Myth #11: Always buy term insurance and invest the difference. Each person’s situation is different. Term insurance may be sufficient for many people but there are taxation and estate issues that a financial planner or accountant can advise you about. For some situations permanent life insurance may be a good option. Also if you follow the logic of investing the difference, be sure you have the discipline to follow through.
Myth #12: Life insurance should always be seven times my annual income. Although this rule has been used often it may be more than you need if you don’t have dependents at home and your parents or spouse is well insured. Also you don’t want to have premiums so high that you can’t meet the payments if you should lose your or lose coverage because your employer lessens your benefits.
Myth #13: Life insurance doesn’t need to be updated. Once you buy a life insurance policy you’re done, right? Actually a life insurance policy should be updated if you have life changes like marriage or divorce, taking care of an elderly parent or children that have grown up and left home. When you take on new responsibilities you may need more coverage. If you have less dependents to care for you may not need as much.
Myth #14: You should only count your salary as income. When determining how much life insurance you need you are not only replacing your salary but your benefits as well. So if your employer provides health insurance for your dependents or other benefits you would need to be sure that you have enough life insurance for them to purchase that coverage on their own.