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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.

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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