Life Insurance Myths Debunked
Misconceptions and misunderstandings have perpetuated a number ofÂ life insuranceÂ mythsÂ over the years and prevented consumers from getting the cover they need. They seeÂ life insuranceÂ as something that it’s not, believing it to be out of their reach because of their lifestyle and their budget, or believing that it’s something it’s not.
If you have dependents, want them to live comfortably, and don’t have assets or funds to give them, you needÂ life insuranceÂ coverage. And if you have been avoiding life insurance because of something you’ve been told or something you believe, it’s time to dispel those beliefs and get to the truth of the matter.
Myth 1:Â Life InsuranceÂ PremiumsÂ are Expensive
One of the mostÂ common mythsÂ concerningÂ lifeÂ insuranceÂ productsÂ is that they are too expensive. It only makes sense, to the uninitiated at least. After all, if they’re promising aÂ death benefitÂ of $200,000 over a twenty-year period, it stands to reason that they would seek to claim at least 25% of that balance to guarantee a profit.
In fact, a recent study found that consumers who had never purchasedÂ life insuranceÂ overestimated the premium costs by between 400% and 500%. That’s a massive difference.
If you’re in your 20s or 30s and are relatively healthy, you can get 20-yearÂ term insuranceÂ for less than $20 a month, and if anything happens during that term your beneficiaries will get $200,000.Â LifeÂ insuranceÂ companiesÂ can afford to offer such huge payouts and low premiums because the chances of a young person dying during that term are very slim.
Assuming you’re paying $20 a month for a 20-yearÂ termÂ life insuranceÂ policy, this means you’re paying $4,800 over the term, or 2.4% of the total payout. However, the odds of a 20-year-old woman dying during this time are 1.42%, and these odds drop significantly if you remove smoking, drinking, risk-taking, and pre-existing conditions from the equation.
In other words, while it seems like a huge sum and a huge discrepancy, it still falls in favor of theÂ lifeÂ insuranceÂ company.
It’s a similar story for aÂ 30-year-old. The odds of dying during the term are higher, but only just, as they are still less than 3%, leading to higher premiums but a great rate overall.
The older you get, the greater your risks become, butÂ insurance companiesÂ want your money. They need you to sign on the dotted line, so they will continue to offer competitive prices.Â
Keep this in mind the next time youÂ purchaseÂ life insuranceÂ and are suspicious of the significantÂ amount of coverageÂ provided in relation to the cost.
Myth 2: It’s All About Money
Financial protection is important. You need aÂ coverage amountÂ that will cover the needs of yourÂ loved onesÂ while also securing low premiums to make life easier for you. However, the generosity andÂ cost ofÂ life insuranceÂ are the only factors to consider.
It’s important to consider the financial rating of theÂ insurance company, which is acquired using a system such as A.M. Best and Moodyâs. These ratings are used to determine the financial strength of a company, which is key, because you’re relying on them being around for many years to come and being rich enough to pay your death benefit when you die.
Myth 3: It’s All About theÂ Death Benefit
WhileÂ termÂ life insuranceÂ policiesÂ are solely about theÂ death benefit, which is paid upon theÂ policyholder’s death, there are other options available. Whole life orÂ permanentÂ life insuranceÂ policiesÂ work like savings accounts as well asÂ life insuranceÂ policies. They accumulate aÂ cash valueÂ over the duration of the policy and theÂ policyholderÂ can cash this sum at any point.
If they do so, they will lose the potentialÂ death benefitÂ and the policy will cease to exist, but it’s a good option to have if you ever find yourself in dire need of funds.
Myth 4: Insurers Find an Excuse Not to Pay
There was a time when pretty much all life insurance policies were reviewed upon the policyholderâs death. Thankfully, this changed with the introduction of a contestability period, which begins at the start of the policy and typically runs for up to 2 years.
If anything happens during this time, the policy can and will be reviewed and if any suspicions are raised, it will be contested. However, if this period passes, there is little the insurer can do. More importantly, if theÂ policyholderÂ was honest during the application process and the type of death is covered, the payout will be made.
The truth is that the vast majority of policies do not payout, but this is because the policies expire, theÂ cash valueÂ is accepted, or theÂ policyholderÂ outlives the term. For policies that actually result in a death, the majority do payout.Â
And why wouldn’t they? AÂ lifeÂ insuranceÂ companyÂ can expect to turn a profit via the underwriting process. It doesn’t need to use underhanded tactics or rob yourÂ loved onesÂ of a payout to stay in the black.
Myth 5: My Dependents Will Survive Without Me
According toÂ LIMRA, a research organization devoted to the insurance and financial sector, most Americans either have no coverage or not enough coverage. In both cases, they may assume their families will survive without a payout or that a small payout will be enough. There is some logic to this belief as it often comes after they perform a quick calculation, but that calculation is flawed.
Let’s imagine, for instance, that you’re a 35-year man with two children aged 5 and 7 and a 35-year-old wife. You earn $40,000 a year and your wife earns the same. You have a $150,000 house and a $100,000 mortgage.
After doing some quick calculations, you may assume that your wife’s salary will be enough to keep her going and ensure your children are looked after until they are old enough to care for themselves. You don’t have any debt to worry about and the only issue is the house, so you settle on a relatively smallÂ death benefitÂ of $100,000.
But you’re making a lot of potentially dangerous assumptions here. Firstly, anything could happen between now and your death. On the one hand, you could comfortably pay off the mortgage, but on the other hand, inflation could rise to a point where $100,000 is a fraction of what it once was, and debts could accumulate.Â
Your wife could also lose her job, and if that doesn’t happen when you’re alive and can get more cover, it might happen when you die, and she’s so overcome by grief and the stress of raising two children that she’s forced to give it up.
And then you have to think about your children. What if they want a college education? Can your wife afford that on her own? And what about your funeral or your children’s weddings? What happens if one of them falls ill and incurs huge medical expenses?Â
$100,000 is a lot of money to receive as a lump sum, and if you only think in terms of lump sums you may never escape that mindset. But it’s not a single sum designed to be spent freely and enjoyed. It’s a sum designed to last yourÂ loved onesÂ for many years and to ensure they are covered for most worst-case scenarios.
By the same token, you shouldn’t assume that yourÂ loved onesÂ will survive without you just because you’re not theÂ breadwinnerÂ or you have paid off your mortgage. Things can turn ugly very quickly. It only takes a few unexpected bills for things to go south, at which point that house could fall victim to an equity loan, a second mortgage, and eventually be owned by the bank when yourÂ loved onesÂ fall behind.
Myth 6: Premiums are Tax Deductible
The premiums of anÂ individual policyÂ are not tax-deductible. However, there are exceptions if the individual is self-employed and using the coverage for asset protection. It’s also worth noting that theÂ death benefitÂ is completely tax free.
Myth 7: You Can’t GetÂ Insurance Above a Certain Age
The older you are, the harder it is to get theÂ financial protectionÂ thatÂ life insuranceÂ can provide. But it’s not impossible, just a little bit more expensive. YourÂ insurance needsÂ increase as you get older andÂ lifeÂ insuranceÂ companiesÂ have recognized this. They provide short-term policiesÂ specifically tailored to seniors.Â
Known as SeniorsÂ Life InsuranceÂ or Final Expense Insurance, these policies provide a low lump sum payout, often less than $50,000, that can be used to pay for a funeral or to clear debts. You can even pay it directly to the funeral home and arrange your own funeral.Â
You may also still qualify for aÂ termÂ life insuranceÂ policy. Of course, traditionalÂ wholeÂ life insuranceÂ policiesÂ are out of the question, and if you have aÂ health conditionÂ you may be refused even a shortÂ term policy, but don’t give up before you do your research and check your options.Â
This is something that most insurance agents will be happy to help you with.
Myth 8: Young People Don’t NeedÂ Life Insurance
Life insuranceÂ provides you with peace of mind. It aims to provide cover during a difficult time and ensures that yourÂ loved onesÂ have financial support when dealing with your death. If you have dependents, then it doesn’t really matter how old you are. It’s true that you will probably outlive the term if you are young and healthy, but no one knows what’s around the corner.
Death is a certainty; the only question is when, not if. By not purchasingÂ life insuranceÂ when you have dependents, you’re rolling the dice and placing their future at risk.
The younger you are, the cheaper the premiums will be and the less of an impact they will have on your finances. What’s more, you can also opt forÂ wholeÂ life insurance, locking a rate in early and avoiding the inevitable regrets when you’re 60, don’t have any cover and are being quoted astronomical premiums.
Myth 9: You Won’t Qualify if you are in Bad Health
If you have been diagnosed with a terminal disease, it’s unlikely that any insurer would cover you. However, if you have survived a serious disease or have a pre-existing medical condition, you may still qualify.
It’s all about risk, and if the insurer determines you’re more likely to survive the term than not, they will offer you a policy based on those probabilities. The less healthy they consider you to be, the more premiums you will pay and the lower yourÂ death benefitÂ will be. But you can still get a worthwhile policy and it might be a lot cheaper than you think.
Myth 10: If You Have Money, You Don’t Need Insurance
If you have assets to leave your heirs, aÂ life insuranceÂ policyÂ is not as important as it might be for a stay atÂ home parentÂ or a low-income couple. However, it still has its uses.Â
For instance, many high-income households have a lot of debt, and while the assets can typically cover this debt, it will eat into the estate. There are alsoÂ estate taxesÂ and legal fees to consider, all of which can significantly reduce the value of the estate.
In this case, a shortÂ term policyÂ can provide someÂ additional coverageÂ and ensure that those extra costs are covered.
Myth 11: The Money is Lost if there are no Beneficiaries
If you die with no beneficiaries, the money will likely go to your estate, at which point the probate process will begin. If you have a will, this process will be relatively quick and painless, and your designated heirs will get what they are owed.Â
If not, things could get messy and the process will be slow. What’s more, if you have any debts, your creditors will take what they are owed from your estate, including yourÂ death benefit.
Adding a beneficiary will prevent all of this, but don’t expect the insurer to contact your beneficiary and let them know. They expect the beneficiary to come to them. It’s important, therefore, to assign at least one (and preferably more) beneficiary and to make sure they know of the existence of the policy.
Summary:Â Life InsuranceÂ MythsÂ Debunked
Now that we’ve debunked the myths concerningÂ life insurance, it’s time for you to get out there and get the cover you need. The type ofÂ life insuranceÂ you need, and the amount ofÂ death benefitÂ you will receive, all depends on your personal circumstances and health.Â
This is a subject we have discussed at length here at PocketYourDollars.com, so check out our other guides on the subject.
Life Insurance Myths Debunked is a post from Pocket Your Dollars.