10 Myths About Buying Life Insurance

Myth #1:  I do not need life insurance since if I am a stay-at-home-parent and do not generate an income.

Although stay-at-home parents may not generate a cash income, they often supply all the valuable services whose replacement costs are quite underestimated. Contributions such as childcare, cooking, housecleaning and household management are crucial in making a family unit function properly and would cost a fortune to replace if that stay-at-home-parent were to disappear.

Aside from having to hire out services so that the surviving spouse can continue working, taking out life insurance would also help pay for funeral expenses and get the surviving family back on its feet by allowing the family to take its time to make all the important decisions on how they will now get along without the stay-at-home parent.

Myth # 2:  I only need life insurance if I have young children or when my financial obligations are the greatest.

Obviously, a life insurance policy is needed most when your children are young or when you are just starting out in life and your debt is the greatest (such as a new home mortgage, car payments and credit card debt).  However, life insurance is also needed later in life depending on your circumstances.  If you are financially able to pay for funeral expenses and are capable of maintaining your lifestyle should your spouse pass away, you may want to borrow against an insurance policy that builds cash value.  You may decide to take a trip or make home improvements.  It is always nice to have “rainy day” money just in case of emergencies as well.  Also, you may also use the life insurance policy to bequest to your future heirs.  Just make sure to check with a tax advisor regarding any tax consequences.

MYTH #3:  Except for face values, all life insurance policies are the same.

Life insurance policies are contracts between you and the life insurance company.  Each policy is very specific in its requirements to obtain and maintain life insurance coverage.
Your life insurance policy will also stipulate situations in which the life insurance company will not cover a claim.  For example, if a policyholder commits suicide within a year or two of the issue date carriers do not generally pay out the face value of a policy.  Your policy will also indicate whether the premiums will remain the same during the term of the policy, whether it is renewable, whether you need a medical exam and whether you can upgrade or borrow against it.  Be sure to check all your information for mistakes to avoid any problems for your survivors.

MYTH #4:  Life insurance companies will not cover me if I am in poor health.

Many life insurance companies now cater to those who have less than perfect health.  Even if another carrier has declined you, it does not mean a different carrier will not issue you a life insurance policy.  You may have to pay higher premiums than those in good health, but there is coverage for those who suffer from chronic health problems.

MYTH #5:  I can get a better rate of return if I invest my money elsewhere.

The main reason to reason for any life insurance purchase is to provide protection for your family; however, certain life insurance policies do offer a mode of investment.  Policies such as whole life, universal life or variable life, offer other features that many people find to be a good investment.  Permanent policies, in particular, provide a cash accumulation value that grows over time and can be borrowed against.  Additionally, long-term rates of return on the cash value are generally comparable to relatively low risk investment products.

MYTH #6: Life insurance companies will always consider me a smoker even if I quit.

The good news for ex-smokers is that life insurance carriers do not hold you to your past.  Most life insurance companies consider you a non-smoker once you been smoke-free for 1 full year.  After one year you can get non-smoker rates.

MYTH # 7:  I have life insurance through my job.  That should be enough coverage.

The life insurance coverage through your employer may not be protecting you and your family as much as you think.  It is important to evaluate the coverage your employer-paid insurance provides and calculate whether it is enough to keep your family financially comfortable should you die unexpectedly.  Also keep in mind that when you leave your job for any reason, including retirement, your coverage stops.  It might be necessary to take out a separate life insurance policy.

MYTH #8:  The “rule of thumb” is to buy two to ten times my annual earnings.
There is a certain “rule of thumb” that suggests you buy a life insurance policy that is 2 to 10 times your annual salary.  Just because you followed the rule of thumb, it does not necessarily mean your life insurance policy will be enough to provide for your loved ones. 

The average American has a policy for about three times his or her annual income.  If you want your family to be able to survive without touching the principle, keep in mind that your survivors usually can withdraw about 5 percent each year from the earnings on a sum of money.  After that 5%, you begin dipping into the principle.  So, for example, if your annual salary is $70,000.00 and you own a policy worth the average 3 times, your face value would be $210,000.00.  Your beneficiaries would be able to withdraw $10,500.00 per year before using the principle amount.  Would this $10,500.00 be enough to support your survivors?

Add up all other income sources, such as your spouse's salary or pension, and any Social Security or other government benefits for which they would be eligible. Your life insurance policy should help close any gaps while also allowing your family to maintain their current lifestyle.

MYTH #9:  I am covered through my mortgage lender.  I do not need further coverage.

Mortgage life insurance only pays off your mortgage if one of the people listed on the loan dies before your loan is paid in full.  Your mortgage lender will neither pay for your funeral expenses or any other debts you have nor will mortgage coverage supplement your surviving family’s income.

MYTH #10:  If term life insurance is really so cheap there must be a catch.

False.  Basic term life insurance policies offer you coverage so long as you pay your premium.  You choose the duration of time you need life insurance coverage and your rate will be based on certain the answers you provide on the questionnaire.  Term life insurance has no cash value.  It’s pure life insurance and that is what makes it affordable.