Life insurance can be tricky to figure out with all its
technicalities and rules. This article will briefly examine the top 10
misconceptions surrounding life insurance to make the road to coverage a little
smoother.
Myth #1: I'm
Single and Don't Have Dependents, so I Don't Need Coverage
Even single persons 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.
Myth #2: My
Life Insurance Coverage Needs Only Be Twice My Annual Salary
The amount of life insurance each person needs depends on
each person's specific situation. There are many factors to consider. 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 #3: My
Term Life Insurance Coverage at Work is Sufficient
Maybe, maybe not. For a single person of modest means,
employer-paid or provided term coverage may actually 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, then additional coverage may be necessary if the
term policy does not meet the needs of the policyholder.
Myth #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 as asset protection for the business owner. Then the
premiums are deductible on the Schedule C of the Form 1040.
Myth #5: I
Absolutely MUST Have Life Insurance at Any Cost
In many cases, this is probably true. However, people with
sizable assets and no debt or dependents may be better off self-insuring. If
you have medical and funeral costs covered, then life insurance coverage may be
optional.
Myth #6: I
Should ALWAYS Buy Term and Invest the Difference
Not necessarily. There are distinct differences between term
and permanent life insurance, and 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 #7:
Variable Universal Life Policies are Always Superior to Straight Universal Life
Policies Over the Long Run
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 additional premiums to be paid in
order to keep the policy in force.
Myth #8:
Only Breadwinners Need Life Insurance Coverage
Nonsense. The cost of replacing the services formerly
provided by a deceased homemaker can be higher than you think, and insuring
against the loss of a homemaker may make more sense than one might think,
especially when it comes to cleaning and daycare costs.
Myth #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 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. (Read more at Are Return-of-Premium Riders Worth It?)
Myth #10:
I'm Better Off Investing My Money Than Buying Life Insurance of Any Kind
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.