Life insurance is by no means a simple product. Even the relatively basic term life policies have numerous provisions and features that you should carefully consider to arrive at the right type and coverage. But the technical aspects of life insurance are actually less important for buyers than trying to determine how much coverage they need and why they need it. Many misconceptions abound, so read on to learn about the top seven myths of life insurance so you can make educated decisions for your life insurance coverage.
Myth 1 – As a Single with No Dependents, I Don’t Need Any Coverage.
This is a completely false assumption. The truth is, even single persons need to have sufficient life insurance to provide funds to pay personal debts along with medical and funeral expenses. If you are not insured, you might leave behind a trail of expenses for your executor or family. Having insurance is also a great way for low- or moderate-income individuals to leave a legacy to their preferred charity.
Myth 2 – My Life Insurance Coverage Must Only Be Double My Annual Salary.
The amount and type of life insurance coverage people need depends on their specific situation. Besides medical and funeral bills, you might have mortgage debts, college loans and other debts that need to be paid off.
A cash flow analysis can determine the actual amount of insurance an individual requires. Those days are long gone when life coverage was computed solely based on a person’s annual income.
Myth 3 – Premium Costs Are Deductible.
That isn’t true in most cases. The costs of life insurance are not deductible unless or until the policyholder has his or her own business (self-employed) and the coverage is being used as protection for the business owner’s assets. Only then are the premiums deductible in the Section C of Form 1040.
Myth 4 – You Should Always Purchase Term Insurance and Then Invest the Difference in Premiums.
This isn’t necessarily true. There are distinct differences between permanent and term life insurance. The cost of a particular term life policy can become extremely high a few years down the line. For that reason, people who are absolutely certain that they need coverage for their entire life should go for permanent coverage. The total premium for an expensive permanent insurance policy over a person’s lifetime might be much less than the premiums for a less-costly term policy. Unlike term coverage, which gets more expensive as you age, a permanent life insurance policy’s premiums remain the same throughout your entire life, no matter how old or how sick you might get.
You should also consider the risk of non-insurability. This can be catastrophic for people who might have some estate tax issues and who will require life insurance to pay them off. Permanent coverage can help you avoid this risk. Permanent coverage will get paid up for after a specified number of premium payments, then the coverage remains in force until death.
Myth 5 – In The Long Run, Variable Universal Life Policies Are Much Better Than Straight Universal Life Policies.
Many universal life policies offer competitive interest rates, while variable universal life policies also contain numerous layers of fees related to not only to the insurance, but also securities elements included in the insurance policy. As a result, if variable subaccounts in a policy fail to perform well, the person holding a variable policy may actually witness a lower cash value than a straight universal life policyholder.
Poor performance of the market can even result in considerable cash calls within variable policies, which can require more premiums to be paid if the policy is to be kept in force.
Myth 6 – Only Breadwinners Require Life Insurance Coverage.
This is not true at all. It can be extremely expensive to replace the services provided by a deceased homemaker — higher than most people think they are. Insuring a homemaker makes much more sense than one may assume, particularly when it comes to daycare and cleaning costs.
Myth 7 – A Return of Premium (ROP) Rider Should Be Purchased on All Term Policies.
A return of premium rider does exactly what it sounds like — it returns some or all of the premiums you pay on a term insurance policy if you do not die during the policy term. Many different levels of return of premium (ROP) riders are available for the insurance policies that offer it. You’ll pay more in premiums for this rider. Most financial planners will tell you that it isn’t very cost effective and that you should avoid it. Whether you include this rider or not would depend on your level of risk tolerance and numerous other investment objectives.
A cash flow analysis would help you determine whether investing the additional premium to buy this rider makes financial sense.
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