The top life insurance myths debunked
Fact-checked with HomeInsurance.com
Everyone needs life insurance. Even so, not everyone understands it. With so many misconceptions surrounding life insurance, it’s important to know what’s true and what’s not before you decide which type of life insurance to purchase.
To help, we’ve chosen the top 11 life insurance myths. After reading, we feel confident you’ll make the best decision for you, your family and your loved ones.
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. Insurance guru Laura Adams says: “If you have life insurance at work, that’s a good start, but it probably isn’t enough to protect loved ones who depend on you. To know how much life coverage you need, consider your income, savings, debt and future needs, such as paying for college.”
Myth #4: Premiums are tax deductible.
A common misperception– unless you have your own small business, the cost of personal life is never deducted. This is because the IRS considers life insurance a personal expense. To the IRS, purchasing life insurance is no different than buying new clothes, going to a restaurant, or purchasing a new car. In the end, it’s a decision you chose to make. Granted, it’s a smart decision — one that should be considered an absolute necessity for your loved ones.
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.
|Key Feature||Whole Life||Term Life|
|Accumulates cash value over time||✓|
|Cost of Premium stays the same with each payment||✓||✓|
|You can choose how long you want your policy to be.||✓|
|Low yearly/monthly premium if you sign up during early adulthood||✓|
|May pay annual dividends||✓|
|Guaranteed payout amount||✓||✓|
The key takeaways with whole life insurance are that it accumulates cash value over time that you can access, it provides lifelong coverage (so your beneficiaries will receive a death payout no matter when you die), it provides a guaranteed payout amount and it may provide dividends year to year (which many people use to pay their premiums).
Key things to remember about term life include:
- You get to choose how long you want to have it
- You may be able to convert it to a whole life policy if you sign up within a given timeframe.
- Your beneficiaries will get a guaranteed death payout in the event of your death.
- Monthly payments stay the same during agreed upon term.
- Premiums are usually lower than whole life.
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 others 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 people when 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.
Myth #10: Life insurance is expensive.
According to Adams, “Many people don’t get life insurance quotes because they assume coverage is unaffordable.” But this isn’t always the case. Adams continues, “The truth is that a term life policy costs much less than you might think. If you’re young or middle-aged and in relatively good health, a $500,000 policy may only cost a few hundred dollars a year.”
But your age and health aren’t the only things that impact your premium costs, according to Adams. “Remember that your life insurance rate also depends on other factors,” she says, “including dangerous occupations or hobbies you may have (such as piloting airplanes, scuba diving and extreme sports), whether you smoke, your driving history and your credit.”
Myth #11: Young people don’t need life insurance.
You’re never too old or too young to purchase life insurance. Whether you’re married or single, you have people in your life that will take it upon themselves to deal with your debts and burial costs. Make sure they have the tools they need so they themselves don’t go into debt.
The takeaway— You need life insurance.
- Employer life insurance is often not enough.
- Both stay-at-home parents and breadwinners need life insurance.
- Both the old and the young need life insurance.
- Life insurance is more affordable than you think.
The biggest thing to understand is that you need life insurance— whether it’s whole life or term life. Whichever you choose is up to you. Just make sure you have something so you don’t create a financial burden for your loved ones in the event of your passing.