9/28/2012 7:47 PM ET|
Top 10 life insurance myths
Life insurance is complex, and there is no one-size-fits-all advice. Don't let misunderstandings stop you from choosing the right coverage.
Life insurance is not a simple product. Even term life policies have many elements that must be considered carefully in order to arrive at the proper type and amount of coverage. But the technical aspects of life insurance are far less difficult for most people to deal with than trying to get a handle on how much coverage they need and why. Here are 10 misconceptions surrounding life insurance (and the realities):
Myth No. 1: If I'm single and don't have dependents, I don't need coverage.
Even single people should have at least enough life insurance to cover the costs of personal debts, medical and funeral bills. If you are uninsured, you may leave a legacy of unpaid expenses for your family or executor to deal with. Plus, this can be a good way for low-income singles to leave a legacy to a favorite charity or other cause.
Myth No. 2: My life insurance coverage needs to be twice my annual salary.
The amount of life insurance you need depends on your specific situation. There are many factors to consider. In addition to paying medical and funeral bills, you may need to pay off your mortgage and provide for your family for several years. A cash-flow analysis can help determine the amount of insurance you need.
Myth No. 3: My term life insurance coverage at work is sufficient.
Maybe, maybe not. For a single person of modest means, employer-paid or -provided term coverage may actually be enough. But if you have a spouse or dependents, or know that you will need coverage upon your death to pay estate taxes, then additional coverage may be necessary.
Myth No. 4: My premiums are tax-deductible.
That's not true, at least in most cases. The cost of personal life insurance is not deductible unless the policyholder is self-employed and the coverage is used as asset protection for the business owner. Then the premiums are deductible on the Schedule C of the Form 1040.
Myth No. 5: Life insurance is a must for everyone.
It is certainly true that most people need life insurance. However, people with sizable assets and no debt or dependents may be better off self-insuring. If you have medical and funeral costs covered, then life insurance coverage may be optional.
Myth No. 6: It is always smarter to buy term coverage and invest the difference.
Not necessarily. There are distinct differences between term and permanent life insurance, and the cost of term life coverage can become prohibitively high as you age. Therefore, those who feel certain that they must be covered at death should consider permanent coverage. Further, while a term policy may appear more expensive, premiums for permanent coverage could go on for many more years.
There is also the risk of becoming uninsurable, which could be disastrous for those who may have estate-tax issues and need life insurance to pay them. But this risk can be avoided with permanent coverage, whichremains in force until death.
Myth No. 7: Variable universal life policies are better than regular universal life policies.
Many universal policies pay competitive interest rates, and variable universal life policies contain several layers of fees relating to both the insurance and securities elements present in the policy. Therefore, if the variable subaccounts within the policy do not perform well, the policyholder may well see a lower cash value than someone with a straight universal life policy.
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Poor market performance can even generate substantial cash calls inside variable policies that require additional premiums in order to keep the policy in force.
Myth No. 8: Only breadwinners need life insurance coverage.
Nonsense. The cost of replacing the services formerly provided by a deceased homemaker can be higher than you think, and insuring against the loss of a homemaker may make sense, to compensate for cleaning and child-care costs.
Myth No. 9: I should purchase the return-of-premium rider on any term policy.
There are usually different levels of return-of-premium riders available for policies that offer this feature. Many financial planners will tell you that this rider is not cost-effective and should be avoided. Whether you include this rider will depend on your risk tolerance and investment objectives.
A cash-flow analysis will reveal whether you could come out ahead by investing the additional amount of the rider elsewhere versus including it in the policy.
Myth No. 10: I'm better off investing my money than buying life insurance.
Hogwash. Until the value of your assets exceeds your debt, you need life coverage of some sort. Once you amass $1 million of liquid assets, you can consider discontinuing (or at least reducing) your million-dollar policy. But you take a big chance when you depend solely on your investments in the early years of your adult life, especially if you have dependents. If you die without coverage, there may be no means to provide for them after your current assets are depleted.
The bottom line
These are just some of the misunderstandings about life insurance. The key concept to understand is that you shouldn't leave life insurance out of your budget unless you have enough assets to cover expenses after you're gone. For more information, consult your life insurance agent or financial adviser.
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This article is very misleading. Two problems.
First, Myth No. 6: "It is always smarter to buy term coverage and invest the difference." The article advocates for "permanent" life insurance. The problem is that you simply cannot get as much permanent life insurance as you can term life for the same amount of money. For a healthy 40-year old man, $500,000 of term life might cost $350 a year while a whole life policy for $500K would be $3,000. On the other side, if all you have to spend is $350 or so, you might be able to get a $10,000 whole life policy. If you're a working person who wants to protect your family, $10,000 doesn't go very far while $500K would make a huge difference to their financial stability. Whole life invests part of the premium, but it takes years before you can get any of your "investment" back--it is NOT a good way to invest. For some wealthy people, whole life can be a wise part of their estate planning but for most people it is definitely not what is needed. Google around to read some good articles (this is definitely not one of them) on why term is better than whole life or "permanent" insurance for most working people.
Second, Myth No.3: "to pay estate taxes". Again, this adivce is slanted to the wealthy--in fact, the very, very wealthy. Most people really don't have to worry about estate taxes. At the federal level, there is no estate tax for money passing to a spouse, so even very, very large estates may not have any estate tax. Further, even when the estate is going to someone other than a spouse, the tax doesn't kick in until the estate is larger than $5.12 million. And then the rate is marginal--in other words, the tax applies only to the amounts over $5.12 million. In the U.S., in 2010 less than 1% of the population had a net worth of even $1 million, let alone $5 million. The situation for the states is more confusing, but only 17 states plus D.C. currently have an estate tax; in 2013, it will be two less. For most of those, the estate tax doesn't begin until the estate has a value over $1 million and estates passing to spouses (and sometimes others) are not taxable. If you're worth more than a million (somewhat less in NJ and RI--and this year, not next, OH), then check out the situation in your state as far as estate taxes are concerned and do your homework concerning life insurance. If you're worth more than $5.12 million--what? you don't already have a good financial advisor?
Life, as well as any / all insurance is 'Risk Management" by you, , , the individual - based on common sence (if any). Anyone will sell you anything you are willing to buy.
Always get the minimum life insurance you can get by with, in the unlikely event you pass on (funeral costs and any debts). Once you are debt free, no life insurance is needed. The author fails to mention how expensive even term life insurance gets when the insured gets past 60 years old. The vast majority of induviduals will never use life insurance, so why pay the premiums.
NEED life insurance? Huh. WHY does anyone NEED life insurance? Mankind has existed for hundreds of thousands (even for the staunchest Creationists, for many thousands) of years. For almost all of this history, we did not have life insurance. And the human race has survived without it, Thank You. Now someone says we NEED it?
When I am dead, I won't need it and won't care about it. My EXECUTOR(S)? NO. They won't need my life insurance either. Your executor is in no way legally responsible for paying any of your debts out of his or her pockets. Only up to the limits of what you have left as your estate.
Do my possible inheritors NEED my life insurance? NO. They may WANT the money, and I MAY want to give them some, but NEED? No.
Do I, or YOU, want - WANT - not NEED - to leave some sum to a beneficiary - whether that be your spouse, kids, a charity, whatever... In that case, having life insurance MAY be a useful thing. But that is a WANT, not a need. Different 4-letter word. Alas, in today's world, we seem to get these things confused. In the case of your WANT to grant a bequest to an inheritor, life insurance is simply you buying an estate! If what you WANT to do is buy some funds to pay your final expenses and "shelter" your estate from paying them... life insurance MAY be the way to do this. Of course, you are also more than free to simply provide named beneficiaries for all heritable assets, so that they simply convey (transfer) on your death to the people you want to have them - property, stocks, bank accounts, etc.
There will be some death-related final expenses, and the prudent will want to arrange for these in ways that make it least painful and difficult for your inheritors - if any. Me? I carry sufficient life insurance to cover funerary and related costs. You? Decide what you WANT to have happen and to whom to leave what, and buy life insurance IF that addresses what you WANT. Not NEED.
The life insurance folks wrote this article. Good marketing based on a seemingly wide-spread inability to distinguish WANT from NEED!
Life insurance is an an investment that most familes should have if something should happen to either the husband or wife. The truth of the matter is that life insurance is not complicated at all. It is myth when they are talking about how life insurance is a complicated matter. Its not. Please, please...talk to a Primerica represenative.
I think you'll see that life insurance is pretty affordable.
Please note: you don't need life insurance if you have sizable assets AND no debt, AND no dependents. The proceeds of a life insurance policy are not taxable unless you're an idiot & make your estate the beneficiary.
No taxes, no probate, the beneficiaries present a death certificate, & get the check within days. Then use the money to pay the probate taxes, outstanding debts, & take home the estate.
Someday life insurance proceeds may be taxed. All you need is a politician willing to stand up in public & announce his intention to take the food out of the mouths of widows & orphans.
Think that'll be anytime soon?
" The cost of personal life insurance is not deductible unless the policyholder is self-employed and the coverage is used as asset protection for the business owner. Then the premiums are deductible on the of the Form 1040."
No, they're not. A business can deduct the premiums on a group term life insurance policy for the benefit of its employees, but never for the benefit of the business or its owners.
Wow. The life insurance bizz has snowed MSNBC. (Actually, that's probably not all that hard.)
If you're single and have no dependents, there may be a moral reason to have life insurance, but there is not a single other reason. Trust me, when you're dead, you're not really going to worry about your creditors.
Myth 6: If you have estate tax problems (except for small business owners), you probably don't really need life insurance.
Myth 7: Re deceased homemakers, if you read the usual tally of how incredibly valuable their services are, you can't afford the insurance it would take to replace them. Why is it that insurance peddlers think you need to be made whole over every loss in life? Some losses can't be made whole by money. If life gets tough, then it's time to get tough, and money really doesn't cut it.
As for Myth 10, HOGWASH is right, but only when said about MSNBC's advice. If you have no dependents, you don't need insurance, and if you're buying it, you're supporting your agent before you get any investment returns.
Oh yeah, and whatever you do, be sure to consult an insurance agent who makes his living by telling you when you shouldn't buy life insurance... Right..
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