10 Myths and Misconceptions about Life Insurance
Many of us put off purchasing life insurance for years, or even decades, because it can seem complicated and daunting—which type of policy is best, how much coverage do you need, and at what age should you purchase life insurance? These questions can overwhelm us and keep us from taking the important step of protecting our family’s security, should something happen to us down the line.
It’s time to take the mystery out of life insurance. Ahead we’ll explain the difference between the two main types of life insurance and the advantages of each, and we’ll cover common myths and misconceptions about life insurance in order to demystify this important coverage.
First, a brief overview of life insurance.
What Is Life Insurance and What Types Are Available?
Life insurance provides a monetary payout to your beneficiary (or beneficiaries) in the event of your death. It helps pay for things like funeral expenses, medical bills, debts, your family’s living costs, and other expenses.
There are two primary types of life insurance: term life and universal life.
Term life insurance is purchased for a set amount of time—typically 10, 20, or 30 years. This type of life insurance is often preferred because it tends to be more affordable.
Universal life insurance follows a person throughout their entire life as long as they maintain their premiums. Universal life pays a benefit to your beneficiary when you die, regardless of how long you live. Universal life insurance is typically more expensive, but it has its advantages.
There are several subtypes of term life insurance, including level term, decreasing term, and annual renewable term. Instant issue life insurance policies are also available for some people. Subtypes of universal life insurance include universal life, variable life, and variable universal life. It’s best to speak with a knowledgeable life insurance agent about what kind of life insurance policy is right for you.
Now that we’ve covered what life insurance is, and its basic types, let’s take a look at some common myths and misconceptions about life insurance.
Myth #1: I’m Single with No Dependents, So I Don’t Need Life Insurance
The reality is that everyone needs at least enough life insurance to cover funeral costs, medical expenses, and any existing debt. It’s also is an excellent tool for single people to leave a gift for their favorite charity. Without life insurance, you could end up leaving a legacy of unpaid expenses behind that family or friends will have to deal with, or that will have to be written off by companies (and which will likely end up being absorbed by taxpayers).
Myth #2: Life Insurance Provides Long Term Care Coverage
While some life insurance policies include provisions for long term care, most life insurance policies do not provide such coverage. Some newer policies have an “accelerated death benefits” feature which allows you take a tax-free advance on your life insurance death benefit if you become terminally ill or have a life-threatening diagnosis; others have provisions for life settlements or viatical settlements. Don’t assume that every life insurance policy has long term care coverage—talk to an expert to be sure.
Myth #3: Only Breadwinners Need Life Insurance
The services that a homemaker provides are not often thought of in monetary terms, yet they are, in fact, quite significant. In one analysis, all the services a homemaker provides would be equivalent to a $96,000 per year salary. When you add up the costs of daycare, the salary of a private “chef,” housekeeper, and personal accountant—it amounts to quite a lot. Life insurance helps ensure that these vital family services are not neglected in the event of a homemaker’s death.
Myth #4: I Only Need Twice My Annual Salary in Life Insurance
The reality is that every person’s needs are different. If you are the sole income earner in your family making $50,000 per year, a $100,000 life insurance policy will likely not be sufficient to provide for your survivors until they reach a point when they no longer require the earned income you are bringing home today. Talk with a professional insurance agent to determine how much life insurance you need.
Myth #5: My Life Insurance through Work Is Sufficient
For a single person who earns a modest income, and who has no dependents, a term life plan through work may be sufficient. If you have a spouse or other dependents, however, you will need coverage to pay estate taxes upon your death, in which case the relatively small term life insurance limits typically available through work may not be enough. If you have a spouse and dependents, choose your coverage wisely.
Myth #6: Life Insurance Premiums Are Tax Deductible
Not necessarily. Life insurance premiums are not tax deductible unless you are self-employed and the coverage is used to protect your assets as a business owner. In this case, the premiums may be deductible on Schedule C of the Form 1040. Consult with a tax expert, since what is and what is not deductible can be complicated. For the rest of us who are not self-employed business owners, life insurance premiums are not tax deductible.
Myth #7: I Can Borrow Against My Life Insurance Policy
This is only true with permanent or universal life insurance policies. Term life insurance policies have no cash value and expire at the end of the term; however, term life policies are less expensive and are therefore more suitable for many people. It’s important to remember that, just like with a conventional loan, you’ll be charged interest on a loan taken out against your life insurance policy, and unpaid interest is subject to compounding. A life insurance expert can help you understand whether a term or universal life policy is best for you.
Myth #8: Investments Make More Sense than Any Type of Life Insurance
Unless you have $1 million or more in liquid assets, you need life insurance if you have a spouse and other dependents. Age is a major consideration when deciding whether to forgo life insurance. In your younger years, relying solely on investments to protect your family is risky. If you die at a relatively young age, without life insurance coverage, you put your family at risk once they deplete your current assets. Life insurance simply provides more stable protection than many other investments.
Myth #9: I Can’t Get Life Insurance if My Health Is Less than Perfect
Not true. While less than optimal health may increase the cost of life insurance, there are nevertheless companies that are willing to sell policies to people with a range of medical problems. Some carriers specialize in high-risk policyholders, in fact. Always be truthful about your health upfront, as it will undoubtedly surface down the road. Those in good health may qualify for instant issue life insurance with no medical exam.
Myth #10: I’m Young, So I Don’t Need Life Insurance
The truth is that no one knows when their time will come. It is best to purchase life insurance when you’re young and healthy. If you develop a medical problem down the line and don’t have life insurance, you may not be able to get the amount or type of coverage you want. Rates can change fairly significantly, based on your age, so don’t wait—purchase life insurance sooner rather than later.
We’ve covered some of the most common myths about life insurance. The most important takeaway is that unless you have enough assets to cover all your debts and provide for your family after you’re gone, you need life insurance—whether you’re 25, 45 or 65. The experts at EQUOTE can help you understand your options and provide you with term life insurance quotes with no medical exam. Call us today for assistance.