10 Life Insurance Myths
Life insurance is not a simple product. Even term life policies have many elements that must be considered carefully in order to choose the proper type and amount of coverage. But the technical aspects of a life insurance policy are far less difficult for most people to deal with than trying to determine how much life insurance coverage they need.
This article will briefly examine the 10 most common misconceptions surrounding life insurance and the realities that may be distorted.
Myth No.1: I'm single and don't have any dependents, therefore I don't need any coverage. Even a single person needs at least enough life insurance to cover the costs of personal debts, medical and funeral bills. If you are uninsured, you may leave an abundance of unpaid expenses for your family or executor to deal with. Plus, this can be a good way for low-income singles to leave a donation to a favorite charity or other cause.
Myth No.2: I only need the amount of life insurance coverage equal to twice the amount of my annual salary. You need an amount of life insurance equal to the amount that is actually required. In addition to medical and funeral bills, you may need to pay off debts such as your mortgage and provide for your family for several years. A cash flow analysis is usually necessary in order to determine the true amount of insurance that must be purchased. The days of computing life coverage based only on one's income-earning ability are long gone.
Myth No.3: My term life insurance coverage at work is sufficient. Maybe it is or maybe it's not. For a single person of modest means, employer-paid or provided term coverage may well be enough. But if you have a spouse or other dependents, or know that you will need coverage upon your death to pay estate taxes or create an estate for charity, then additional coverage may be necessary if the term policy does not meet the needs of the policyholder.
Myth No.4: At least the cost of my premiums will be deductible. Not in most cases. The cost of personal life insurance is never deductible unless the policyholder is self-employed and the coverage is used to insure the business. Then the premiums are deductible on the Schedule C of the Form 1040.
Myth No.5: I absolutely MUST have life insurance at any cost. In many cases, this is probably true. However, persons with no debt or dependents and sizable assets may be better off self-insuring. If you have no debt and medical and funeral costs are covered, and then life insurance coverage may be optional.
Myth No.6: I should ALWAYS buy term and invest the difference. Not necessarily. The cost of term life coverage can become prohibitively high in later years; therefore, those who know for certain that they must be covered at death should consider permanent coverage. The total premium outlay for a more expensive permanent policy may be less than the ongoing premiums that could last for years longer with a less expensive term policy. There is also the risk of non-insurability to consider, which could be disastrous for those who may have estate tax issues and need life insurance to pay them. But this risk can be avoided with permanent coverage, which becomes paid up after a certain amount of premium has been paid and then remains in force until death.
Myth No.7: Variable universal life policies are always superior to straight universal life policies. Many universal policies pay competitive interest rates, and variable universal life (VUL) policies contain several layers of fees relating to both the insurance and securities elements present in the policy. Therefore, if the variable sub accounts within the policy do not perform well; the variable policyholder may well see a lower cash value compared to a non variable universal life policy. Poor market performance can even generate substantial cash calls inside variable policies that requires additional premiums to be paid in order to keep the policy in force.
Myth No.8: Only breadwinners need life insurance coverage. That is nonsense. The cost of replacing the services formerly provided by a deceased homemaker can be higher than you think, especially when it comes to cleaning and daycare.
Myth No.9: I should always purchase the return-of-premium (ROP) rider on any term policy. There are usually different levels of ROP riders available for policies that offer this feature. Many financial planners will tell you that this rider is not cost-effective and it should be avoided. Whether you include this rider or not, will depend on your risk tolerance and your other possible investment objectives. A cash flow analysis will reveal whether you could come out ahead by investing the additional premium amount, of the rider elsewhere, instead of putting it into the policy. Riders are available to provide additional benefits that help you customize your policy.
Myth No.10: I'm better off investing my money than buying life insurance of any kind. Complete nonsense. Until you reach the break even point of asset accumulation, you need life coverage of some sort, keeping in mind the exception discussed in Myth No.5. Once you amass $1 million of liquid assets, you can consider whether to discontinue, or at least reduce, your million-dollar policy. But you take a big chance when you depend solely on your investments, especially if you have dependents. If you die without coverage for them, there may be no other means of provision after the depletion of your current assets.