Top 10 Insurance Myths

AAA

Top 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 arrive at the proper type and amount of coverage. But the technical aspects of life insurance are far less difficult for most people to deal with than trying to get a handle on how much coverage they need and why. This article will briefly examine the top 10 misconceptions surrounding life insurance and the realities that they distort.

Myth No.1: I Don't Need Coverage, I'm Single With No Dependents

Even single people need at least enough life insurance to cover the costs of personal debts, medical and funeral bills. If you are uninsured, you may leave a legacy 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 legacy to a favorite charity or other cause. (Read Gifting Your Retirement Assets To Charity to learn more about these types of donations.)

Myth No.2: I Only Need Coverage Equal to Twice My 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 at Work Is Sufficient

Maybe, maybe 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 those needs.

Myth No.4: The Cost of My Premiums Will Be Deductible

Afraid not, at least 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. (Read more about safeguarding your business assets in Asset Protection For The Business Owner.)

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, 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.

Myth No.7: Variable Life Is Better Than Straight Universal Life

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 subaccounts within the policy do not perform well, then the variable policyholder may well see a lower cash value than someone with a straight universal life policy. Poor market performance can even generate substantial cash calls inside variable policies that require that additional premiums be paid to keep the policy in force.

Myth No.8: Only Breadwinners Need Life Coverage

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. (For more information on this topic, see the article titled Insuring Against The Loss Of A Homemaker.)

Myth No.9: I Should Always Purchase the Return-of-Premium Rider

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 should be avoided. Whether you include this rider will depend on your risk tolerance and other possible investment objectives. A cash flow analysis will reveal whether you could come out ahead by investing the additional amount of the rider elsewhere versus including it in the policy. (Riders are available to provide additional benefits that help you customize your policy. Learn more about these riders in our related article Let Insurance Riders Drive Your Coverage.)

Myth No. 10: I'm Better Off Just Investing My Money

Hogwash. Until you reach the breakeven point of asset accumulation, you need life coverage of some sort (barring 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 in the early years of your life, 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.
  1. No results found.
Related Articles
  1. Insurance

    Top 10 Life Insurance Myths

    The most difficult aspect of this complex product is determining how much coverage you need and why.
  2. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  3. Insurance

    3 Reasons to Avoid Term Insurance

    Find out the reasons why term life insurance may not be for everybody, and why you may want to avoid it in favor of a permanent life insurance policy.
  4. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  5. Insurance

    4 Reasons Why Waiting To Buy Life Insurance Is a Bad Idea

    Understand the benefits of applying for and securing life insurance coverage while you are young and healthy, and learn the cost of waiting to get coverage.
  6. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  7. Insurance

    Getting Your (Insurance) House in Order

    From starting a family to retirement, insurance can play a role in taking care of financial needs. This piece looks at some of the choices you can make.
  8. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  9. Insurance

    Millennials Guide: Too Young for Life Insurance?

    Unless you have kids, it's easy to think you don't need life insurance Here are the reasons why you might– as well as which type and how much to get.
  10. Insurance

    Finding the Right Life Insurance

    Learn how to determine the type of life insurance you need and use our calculator to find out how much coverage you should have.
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center