Top 10 Life Insurance Myths Revealed

Life insurance can be tricky to figure out with its complex rules and choices among competing opportunities. With the wrong information, you could end up with the wrong policy which wastes your money and doesn't properly protect your loved ones. This article will briefly examine the top 10 misconceptions surrounding life insurance to help make your road to coverage a little smoother. 

1. I Don't Need Coverage Because I'm Single and Don't Have Dependents

Single people may need at least enough life insurance to cover their outstanding personal debts and medical and funeral bills. If you are uninsured, you may leave a legacy of unpaid expenses for your family or other loved ones to deal with. If you have enough cash to cover these expenses, whether you need life insurance depends on your future goals.

Those who are young and single with no plans to marry or have children probably do not need life insurance. On the other hand, if you do plan to start a family later on, you can buy coverage at cheaper rates now, versus waiting until later when it's more expensive. Life insurance can also be a way to leave a legacy to your favorite charity or other cause.

2. My Life Insurance Coverage Only Needs to Be Twice My Annual Salary

Two years of your salary might sound like plenty of money, but weigh it against your family's long-term needs. In addition to medical and funeral bills, you may need to pay off debts—such as your mortgage—and provide income for your family for several years. For this reason, experts typically recommend at least 10 years' salary for life insurance coverage.

Rather than using a rule of thumb, you could also calculate exactly how much life insurance you need with a cash flow analysis. The days of computing life coverage based only on one's income-earning ability are long gone.

3. My Term Life Insurance Coverage at Work Is Sufficient

Maybe. For a single person of modest means, employer-provided term coverage may actually be enough. But if you have a spouse or other dependents, or anticipate needing additional funds upon your death to pay estate taxes, additional coverage may be necessary.

Employer-paid or employer-provided term insurance provides convenient guaranteed coverage at a low cost. However, it will only be available while you remain with your employer and it does not provide permanent coverage throughout your lifetime.You may want a policy outside of work so you don't suddenly lose your protection after leaving your job.

4. The Cost of My Premiums Will Be Deductible

This is not true in most cases. The cost of personal life insurance is never deductible unless the policyholder is self-employed and the coverage protects the business owner's assets. In this scenario, premiums are deductible on Schedule C of Form 1040.

5. I Must Have Life Insurance to Cover Final Expenses

For many people, this is often true. However, those with sizable assets may be better off self-insuring. When you self-insure, you use your own savings to cover your medical and funeral costs while providing for your loved ones. You save money by self-insuring as you aren't paying for the cost of setting up a policy. However, you might still decide to buy a policy to create a larger inheritance or as a backup in case you spend down your savings more quickly than expected.

6. I Should Always Buy Term and Invest the Difference

This is not necessarily true. Term life starts out less expensive than permanent life insurance, which gives you more money to invest. However, term gets more expensive over time and can become prohibitively high in later years. Permanent policies like whole life do not increase your premium as you get older. The total premium outlay for a permanent policy may actually end up less than what you'd spend on term coverage that keeps getting more expensive over time.

Term coverage eventually ends as insurers set a maximum age limit for renewals. Those who know for certain they must be covered at death should consider some amount of permanent coverage.

Permanent life insurance also builds cash value which you can withdraw or borrow against while alive. While cash value may not grow as quickly as investing in the stock market, it's still extra savings. Ask yourself whether you would truly invest the difference after buying term or if you'd spend it. Some might prefer buying cash value life insurance as the monthly premiums essentially force you to save money over time.

7. Variable Universal Life Policies Are Always Superior to Straight Universal Life Policies Over the Long Run 

In theory, the long-run investment return of a variable universal life policy (VUL) should outearn a straight universal life policy but that's not guaranteed. Your cash value growth in a VUL depends on the performance of your investments. Poor market performance may result in a a lower cash value than someone with a straight universal life policy. If you prefer to keep it safe, universal life policies with no risk of losses could be the better option.

8. Only Breadwinners Need Life Insurance Coverage

Nonsense. The cost of replacing the services formerly provided by a deceased stay-at-home can be higher than you think, so insuring against the loss of a partner who does not work outside the home may make sense. Stay-at-home spouses provide daycare, transportation, cleaning, meal preparation, and many other quality services that can be difficult and expensive to procure outside the family.

9. I Should Purchase the Return-of-Premium (ROP) Rider on Any Term Policy

A return-of-premium (ROP) rider might seem like an excellent deal as you get all your money back if you outlive the term of your life insurance policy. However, you need to pay more per month for this feature. Consider the opportunity cost. Do you think you'd be better off investing the extra cash or would you prefer to play it safe and get your premiums back from the ROP rider on the life insurance?

10. I'm Better Off Investing My Money Than Buying Life Insurance of Any Kind

Doubtful. Perhaps by the end of your career, you'll have saved enough to cover all your needs and to provide for your family. But you take a big chance when you depend solely on your investments in the early years of your life, especially if you have dependents. If you die early in your career, chances are your investments will not be nearly enough to pay off your mortgage or to support your young children. If you want to keep as much money as possible for your investments, consider a low-cost term policy. You'll protect your loved ones while still keeping most of your money for investing.

The Bottom Line

These are just some of the more prevalent misunderstandings concerning life insurance. You probably should not leave life insurance out of your budget unless you have enough assets to cover your expenses after you're gone. For more information, consult your life insurance agent or financial advisor, and be sure to do your research to determine which of the best life insurance companies is right for you.