I understand that life insurance can be a confusing thing. Not only are there different types of life insurance to choose from, each policy has elements to it that should be carefully considered. Then you have to decide on the right amount of coverage.
Things can get even more confusing when there are many myths going around about things like how much coverage you really need, and even if you need it at all. Let’s look at some of the top myths about life insurance and what you really need to know.
Myth #1: You don’t need life insurance you don’t have dependents.
Truth: Even if you don’t have dependents, and even if you are single, you still should have enough life insurance to help cover your debts, any medical bills and funeral costs. If you are uninsured, all these expenses will be left for any family members you have to deal with. You don’t want to be that person who leaves a legacy of expenses for everyone else do you?
Myth #2: The coverage I get from work is good enough.
Truth: It may be, but it also might not be. If you’re single, what your job provides you may be enough. But if you have dependents or know you will need a certain amount upon your death to cover estate taxes, you will likely need additional coverage. Your best bet is to determine your needs and thoroughly go over the life insurance policy provided by your work to see if it is enough.
Myth #3: My life insurance coverage doesn’t need to be more than double my annual salary.
Truth: Like most things in the finance world, the amount of coverage you need really depends on your individual situation. In addition to considering how much your current income is, you should also look at your age, medical bills you may have, any debts you have, if you may have any future obligations, whether or not you are insuring anyone else, etc.
You should also evaluate your cash flow. Take a realistic look at the amount of money you have coming in and how much you have going out. All these factors can help determine a more accurate coverage amount than just “double your salary.”
Myth #4: My premiums will be deductible.
Truth: Unfortunately, premiums aren’t deductible. At least for most people. The only time life insurance premiums are tax deductible is if you are self-employed, AND the coverage is used to protect your business assets. In this case, the premium you pay can be deducted using Form Schedule C.
Myth #5: Life insurance is absolutely necessary.
Truth: Okay, in most cases, having life insurance is really a good idea. I mean, there are so many good reasons to have a life insurance policy. It can be a reassurance that your family would be taken care of if anything were to happen to you. It is a good, safe way to protect your assets and accumulate cash value. Also, any outstanding medical, funeral and debt expenses wouldn’t fall on your loved ones.
However, some people with no dependents or debt, may be able to get away with just self-insuring, covering their medical and funeral costs.
Myth #6: I should buy term life insurance and invest the rest.
Truth: Term isn’t always the answer. There are some major differences between term and universal life insurance, with pros and cons to each of them. For example, term insurance may be for you if you need temporary protection. It comes with a lower premium, which is the main draw for many people. However, term insurance premiums start to increase after the initial period. Upon death, term life insurance pays face value. It does not build any equity for the time you own the policy.
Universal life insurance, on the other hand, is more costly but it does build up in value. You are able to take loans out against your policy if needed. For those of you who know for a fact that you must be covered upon death, universal life will be the smarter investment for you.
Myth #7: Only the family breadwinner needs life insurance.
Truth: Logically speaking, it does make some sense to insure only the money-maker of the family. However, it pays to insure the other partner as well. Even if that partner isn’t raking in the dough, the costs to replace him or her may be higher than you think. Check out this article about just how much a homemaker is worth. Besides initial funeral and possible medical costs, you could be facing new costs like childcare and cleaning that you never had to pay before.
Myth #8: I don’t need life insurance at all. I’m better off just investing my money.
Truth: Unless you can honestly say your gains are equal to or more than your losses, meaning you have the same amount of assets as you will spend/need upon death, you will need some sort of life insurance coverage. The exception is if you’re among the few that fall under myth #5. Also, if you have more than say, 1 million in liquid assets, you can consider whether or not you need life insurance. Keep in mind that even with a large accumulation of assets, you still take a big risk by cancelling your life insurance policy, especially if you have dependents.
Life insurance can be an overwhelming investment. The fact that there are many myths going around about what you need and when you need it doesn’t make figuring out life insurance any easier. Want to know more about your life insurance options? Contact us today.