Even the most basic life insurance policies possess certain technical elements which can be confusing. As a result, there are numerous misconceptions concerning:
- Who should purchase life insurance?
- How much coverage is needed?
- Which type of policy is best?
- What are the taxation implications associated with life insurance?
So, here you go: a list of the top ten most common myths to work around as you determine the best life insurance investment plan for you.
Top 10 Life Insurance Myths
Myth #1: Everyone should definitely carry as much life insurance as they can possibly afford to.
This is actually true for the vast majority of people, especially if they wish to leave their loved ones, or charities, with as much as they can. It is NOT true, however for those who are loaded with assets. For those who are very wealthy, and especially if they have few or no dependents, self-insurance may be the best option.
Myth #2: Single people, who have no dependents, do not need life insurance.
Well, this is up to the individual of course. It’s worth noting though that most people don’t want to make their exits with loads of outstanding debt. They like to make sure that they at least have the financial fortitude to take care of any final bills, and the costs of their own funerals. Also, even for the person who has absolutely nobody to leave anything to, there’s still the option of leaving a sizable chunk of cash to their favorite charity.
Myth #3: It’s best to buy term coverage, and then use the savings to make other investments.
Remember that as we age, term life insurance policies become increasingly pricey. And in time, you could become uninsurable. Permanent life insurance policies stay in effect until death. You need to look at short and long-term costs associated to make the best decision.
Myth #4: I need to have an amount of life insurance that is at least twice my annual salary.
There is no basis for this. Of course, it follows that having three times your annual salary would be better. You have to assess your particular situation to determine the optimal amount of life insurance for you. The more you want; the more it costs. So you need to perform what’s called cash-flow analysis, and clearly define what future expenses you want to make sure are covered when you’re gone.
Myth #5: Variable universal life insurance policies are superior to regular universal policies.
The bottom line here is that the payouts will always depend on current market conditions with a variable universal policy. If the sub-accounts of a variable universal policy are not performing well, then the cash value drops. A regular universal policy may in fact outperform the variable type; happens all the time. There are also fees and the possibility of increased premiums with variable types. It’s best to have a licensed life insurance agent explain the subtleties here.
Myth #6: The term life insurance I have from work is all that I need.
This could be true, but only for a single person with few assets to maintain after passing. If you have a spouse, children, other survivors or even charities that you care about, then you should consider additional life insurance coverage.
Myth #7: Life insurance premiums are completely tax deductible.
Most times, this is not true. In the case of self-employed persons, who utilize the coverage to protect the future of their business assets, premiums are deductible. Schedule C for the 1040 Form would be used to deduct these expenses.
Myth #8: Just the moneymaker in the home should have life insurance.
Welcome to 2014! It won’t take too much thought to figure out the costs associated with replacing the many services provided by a homemaker. Child care, home maintenance, cooking, cleaning and more surely are important for the long-term profitability of an estate investment.
Myth #9: The premium payments for my life insurance coverage would be better invested elsewhere.
This could be true – IF your assets outweigh your liabilities. For most of us, that’s not the case and so life insurance still makes excellent sense from an investment viewpoint. Young investors need to keep their families covered against a tragedy that leaves them to fend for themselves. It makes better sense to remain covered by life insurance until you have amassed enough of your intended fortune to not need it.
And finally, Myth #10: A Return-of-Premium rider for term policies is a necessity.
When Return-of-Premium riders are offered on life insurance policies, there are normally more than one type to select from. It’s going to boil down to how risky you’re feeling. You’ll have to weigh your investment priorities with your stomach for potential loss and make that determination on a case-by-case basis.
Dispelling these top 10 life insurance myths can be difficult for many, especially without expert advice. It’s always best to simply contact your life insurance agent, in person, and just ask them. They have the knowledge you need to help guide you through your toughest life insurance myth-busting undertakings.