Life insurance is not on the priority list for a lot of people. According to industry group, LIMRA, 30% of U.S. households have no life insurance. Half of those surveyed by LIMRA last year said everyday expenses like food, transportation, and clothing were limiting their ability to save for financial goals. With little wiggle room in budgets, life insurance can be seen as a luxury they can't afford. In fact, nearly 90% of those surveyed said hadn't bought life insurance because they think it is too expensive.
That thinking reveals just one of the many myths about life insurance. To keep it simple, life insurance pays out a sum of money either on the death of the insured person or after a set period. It is primarily income protection, but can serve many purposes. But somehow, there's a lot of confusion about life insurance that can keep people from buying life insurance or to make poor choices when buying, or wrong moves later.
To learn more about life insurance start here:
- Life Happens
- Insurance Information Institute
- American Council of Life Insurers
Here's a look at the myths and truths.
I'm young and don't need it
Many people eventually get married. If you're smart enough to buy it when you're young and single with a low monthly cost of insurance, you'll benefit in the long run, says Patrick Bet-David, author of The Next Perfect Storm, which is about life insurance. Life insurance can be more expensive if you wait until your 40s to purchase a policy. Also, when you're young, "You still have a need for final expenses, unpaid debts and medical bills."
My policy at work is plenty
Typically, the coverage you get at work is 2-3 times your income. That helps, but it's likely not enough. You may need additional or different coverage. Then too, what if you've been with your company nearly 20 years and now you're in your early 40s and get laid off. "You have no coverage and three dependents who count on your income. Having your own policy outside of work protects you regardless of what your company decides to do," says Bet-David. Sometimes you can convert your group policy to individual coverage, check with your HR department, but why take chances?
Only the breadwinner needs coverage
A stay-at-home spouse needs protecting too. "Consider the value and cost of replacing the services provided by the stay-at-home spouse. It can seem cold to think about it that way, but most people underestimate the value of the services they provide," explains Bryan Freeman, founder and president of Habersham Funding.
The process is too complicated
Technology has and continues to drastically simplify the process for people interested in purchasing life insurance. Online tools and resources do a lot of the legwork and make it easy and convenient to purchase. Electronic delivery and policies and paperwork speed up the process and fit with people's electronic-centered lives. "People may also benefit from a new trend – a simplified-issue life insurance, which lets them complete a short application to which the insurance then quickly responds," says Marilyn Timbers, an ING retirement coach.
Set it and forget it
That strategy isn't ideal when investing or when it comes to life insurance. Your needs change over the years and you want to make sure you have the right coverage. "People who have taken the time to purchase life insurance often don't think about their coverage again for many years, if ever," says Timbers. They may not be reminded to consider it until they have a major life event, such as marriage, having a child, or a job change. "Review life insurance every couple of years," she says.
Term is better than whole life
The truth is, one is not better than the other, says David Alemian, a retirement planner and licensed life insurance producer. "They are both tools that are used to solve a problem. There is a proper time to buy term insurance and there is a proper time to use permanent life insurance."
Life insurance doesn't provide much flexibility
Actually it can be a flexible product, both in the premiums and the needs it fulfills. Depending on the type of policy you buy, it can allow you to accumulate wealth in a tax efficient manner for retirement, pass wealth tax free to your heirs, or to help finance long-term care needs, explains Timbers. There are appealing tax advantages of life insurance that can't be undervalued.
I'll need life insurance to pay estate taxes
With the federal estate tax exemption having increased from $1.5 million 10 years ago to $5.34 million in 2014, many people who thought they'd be subject to estate tax in the past no longer will have to pay this tax. "Make sure you stay aware of changes in estate tax rules, so that you're not surprised to find out too late that the rules have changed," says Paul Jacobs, a certified financial planner and chief investment officer with Palisades Hudson Financial Group.
Investment returns on whole life insurance are an attractive alternative to equities
Typical whole life insurance provides a similar investment return as a portfolio of bonds, says Jacobs. This isn't surprising, because insurers invest in large bond portfolios, he says. Equities have provided higher returns than bonds over the long-term and that's not likely to change. "We continue to recommend that investors look to the stock market primarily for long-term growth, and life insurance as protection against premature death."
I won't be dying soon, I'll get it later
Tomorrow, tomorrow, tomorrow. Everyone has a date with death, it's just that you don't know when. If it happens sooner than you think, what then? Bet-David shares his experience, "I met with a 38 year-old restaurant manager with three kids under the age of 10 and a wife who gave me that exact line. Six weeks later he went to sleep and never woke up. It was tough on me as a rookie agent because I personally witnessed what happens when you think you'll be living a long time. His wife was left behind with three kids and she had no job."