Life insurance isn’t something most of us learn about in school. I didn’t even learn to balance a checkbook or make simple car repairs.
But life insurance is one of those cornerstones of sound financial planning that everyone needs to be familiar with.
This post tries to dispel some of the most common life insurance myths and misconceptions. Most of these stem from things people have heard rather than from misinformation that’s been published anywhere.
That doesn’t make these myths and misconceptions less costly, though.
According to the 2015 Insurance Barometer Study, 80% of Americans overestimate the cost of a life insurance policy. Most of the customers surveyed estimated the cost of a $250,000 term policy for a 30-year-old at the following prices:
But the actual price for such a policy is only $160/year.
That’s only $13/month.
I could compare $13/month to all kinds of expenses for you, but you’re smart enough to know that $13/month is next to nothing. You can do the math for yourself to calculate how many lattes or movie rentals you’d need to give up to free up that much money in your budget.
Even if you’re not a healthy 30-year-old, chances are you’re overestimating what life insurance might cost, too.
There’s a quick cure for that. Get in touch with us to get a quote from one of dozens of life insurance companies.
Not all life insurance policies are that affordable. In fact, that data is 2 years old and refers to a specific policy for a specific person. Your needs might make life insurance more expensive, but it’s still probably cheaper than you think.
This is true for some people. But like most blanket statements, it doesn’t take into account individual situations.
Yes, term insurance is appropriate for many customers. Investing the difference in price between a term policy and a permanent policy makes sense, too–given certain assumptions.
One of those assumptions is that you’ll have the discipline to actually invest that difference. Another is that those investments will perform well on an annual basis. (That’s not guaranteed). One more assumption is that you’ll be able to renew every year, which is not necessarily the case.
According to David F. Babbel, most customers who follow the buy term and invest the difference advice actually buy term and SPEND the difference. Even the disciplined customers who invest the difference often make the mistake of getting emotional about their investments. This leads to buying high and selling low out of fear.
The idea behind buying term and investing the difference is that investing in the stock market should, over time, offer a higher return than the cash value of a permanent life insurance policy. This might be true. The problem is that the stock market fluctuates.
The cash value of a permanent life insurance policy grows slowly, yes. But it grows steadily over time. An investment in the stock market rises and falls with the market.
The “buy term and invest the difference” philosophy is a marketing buzzword created by a company called Primerica. They offer a variety of financial products besides life insurance. In fact, the only kind of life insurance they sell is term. They don’t even have permanent policies available.
It’s little wonder that they don’t discuss the pros and cons of other, competing coverage types.
Many consumers have various reasons for thinking they don’t need life insurance. Some think that if they’re not the breadwinner for the family, they don’t need coverage. Others think that they’re too young to have to worry about life insurance. Or maybe their kids are all grown up.
No matter what role you play in the family financially, your burial needs will come with an associated cost of between $7000 and $10,000. Some people have that kind of cash lying around, but not everyone.
But even if you’re not the breadwinner, your role in the family has a financial effect. Suppose you’re a stay-at-home mom. You take care of the kids, the laundry, and the meals. If you die young, the surviving parent will almost certainly need to hire someone (at least temporarily) to pull your share of the weight.
Here’s another example:
Suppose you’re elderly, your kids are grown, and you have a lot of money. Maybe you’d prefer that your heirs not have to lose a huge chunk of their inheritance to the IRS. A robust life insurance policy can be an affordable way to defray that cost.
Sure, some people really don’t need life insurance. Warren Buffett and Bill Gates have such huge fortunes that life insurance would be redundant.
But most people need at least some life insurance.
You might even think you’re too young for life insurance. The reality is that buying life insurance when you’re young is the BEST time to buy it. Your premiums are lower. As you get older, premiums increase–so does the likelihood of developing a health problem that will raise your premiums even more.
Yes, life insurance is more affordable if you’re in good health.
But that doesn’t mean you’re unable to get insurance if you have health problems.
In fact, you can even qualify for some life insurance policies without having to undergo a medical exam.
No matter what your particular health problems are, you can still get life insurance. The trick is finding the company and policy that’s appropriate for your situation. Again, get in touch with us. We have access to over 100 different companies–many of which specialize in providing life insurance policies to people who think they don’t qualify.
And as I pointed out earlier in this post, you’re probably overestimating what a life insurance policy might cost.
This is similar to some of the other life insurance myths on this page. Yes, you might pay more for a life insurance policy if you’re older. In fact, it’s almost a certainty.
That doesn’t mean you can’t get life insurance. It doesn’t mean you don’t need it, either.
Chances are that you’ve grown your income throughout your career, so your earning power can help with the increased cost of buying life insurance when you’re older. Also, if you’re earning more money, you need life insurance more than most people with lower incomes.
Most companies provide some life insurance as part of your benefits package. You usually get coverage roughly equivalent to your annual salary. Some companies even offer to double your salary as coverage.
You can often buy additional coverage through your company’s plan. This is usually limited to your annual salary multiplied by 4, 5, or 6.
Here’s the problem with that:
Most experts suggest you need at least 10 times your annual salary in coverage.
That’s not the only problem with putting all your life insurance eggs in the “I have insurance through my job” basket.
Do you get to keep your life insurance policy if you get laid off?
If you’re required to convert your policy, will the new policy still be affordable?
Even if you’re able to buy affordable coverage after leaving your job, it might cost more if your health has gotten worse since you joined the company.
You can often get better prices on life insurance from somewhere other than the company you work. Also, you have little control over the future pricing of your company-provided life insurance.
The best approach is to have additional insurance on top of the policy you have through work.
I’m not sure where this myth originated, but life insurance premiums are not tax deductible.
But the cash value growth of a permanent policy is usually tax-deferred.
What does that mean?
It means that you don’t pay taxes on that money until you access it. This helps your money grow faster because you’re not paying taxes on the interest. The power of compound interest increases when the tax payments are deferred.
Everyone has different needs, based on their circumstances, when it comes to how much life insurance to buy. This intimidates and overwhelms some customers.
But life insurance isn’t as complicated as you think.
The first thing to understand is that you really only have 2 types of life insurance to consider:
You can learn some of the most common life insurance terms and jargon by reading this post on our site.
Yes, permanent life insurance is appropriate for some customers. Term life insurance is appropriate for other customers. It’s also appropriate to have policies of both kinds–depending on your situation.
The rule of thumb when talking about life insurance needs is that your needs vary based on your situation. If you’re an executive at a major corporation earning $300,000 a year, your stay-at-home mom and wife might expect you to have more coverage than someone with a lower income in a two-income family.
Permanent life insurance might be too expensive for you. If that’s the case, buy a term policy. That’s better than having no policy at all.
Also, you might have a health problem that makes you ineligible for a permanent life insurance policy. If that’s the case, you should buy term rather than be uninsured.
Some extremely disciplined and intelligent investors might be appropriate candidates for the “buy term and invest the difference” philosophy I wrote about earlier. That’s a decision only you can make.
How risk averse you are and what you can afford is something to discuss with a professional who has access to multiple life insurance providers–preferably providers who offer both permanent and term policies.
It’s possible you should change your lifestyle. Maybe you should quit smoking. Maybe you should start exercising and lose a little weight. If you’re a heavy drinker, you probably should quit.
But don’t make any of these changes to lower the cost of your life insurance.
Make these changes because you deserve to be healthier. You deserve to live longer. Your family loves you and wants you to be around a while longer.
Those kinds of reasons for making changes to your lifestyle are priceless. A reduction in the cost of your life insurance is a bonus, sure.
But it’s just the icing on the cake.
Life insurance myths are everywhere, but mostly they’re in the minds of the less well-informed customers out there. Having read this post all the way through, you’re better educated about life insurance than most people.
Before you leave, I want you to know that life insurance isn’t too complicated for you to understand. Your needs vary based on your circumstances. Beware of any advice that’s too general or doesn’t take into account your situation.
You’re not too young to need life insurance. You’re not too old to buy life insurance, either. Sites like ours, which access over 100 different providers, can help you find something appropriate for your needs.
Even if you’re elderly or in bad health, you can (and should) be able to buy some kind of life insurance policy.