Dispelling Myths about Life Insurance
In the past, prospective policyholders used to turn to agents and brokers for their information about life insurance. The Internet has changed that forever. If you're like the average consumer, what you do know about the policies, you've probably gotten online. While the Web is a source of a lot of quality information, it's also the biggest source of misinformation about coverage. Below, we've compiled the seven most common and most insidious myths about policies to help you sift through the mountains of available information and make an informed coverage decision.
- My death benefit should be two to three times my income. Depending on your financial situation and that of your beneficiaries, this heuristic could result in being under- or over-insured. Each person is unique and needs to perform a comprehensive asset and income analysis to determine an appropriate death benefit.
- I don't have dependents, so I have no need for the protection. While there is some truth to this, a small amount of protection might be appropriate in this situation to cover final expenses, including burial costs, probate, etc. Insurance can help you avoid burdening the people who love you with funeral costs.
- I have enough coverage through my employer that I don't need an individual policy. For the vast majority of Americans, an employer-provided plan is a pittance compared to what their beneficiaries would actually need in the event of the insured's death. According to the Life and Health Insurance Foundation for Education, the average employer-sponsored policy pays only 2-3 times the insured's income when most industry professionals recommend around 10.
- Life insurance is absolutely necessary in every case. Most people could benefit from some form of protection, but there are exceptions. Some people are essentially self-insured, meaning they have minimal debt and assets that are substantial enough to meet their dependents' needs in the event of their death.
- The premiums on my policy are tax deductible. Unfortunately, this is usually not the case. Policy premiums are only deductible for self-employed policyholders who use them to protect the assets of a business owner. That is not to say, however, that policies cannot offer tax benefits. For instance, the cash value on permanent policies usually accrues on a tax-deferred basis.
- People who have dependents but don't earn an income needn't purchase coverage. This is one of the most dangerous myths about these policies. People who contribute to a household but don't earn an actual income, such as homemakers, still have considerable economic value. If a stay-at-home mother were to die, for example, her family would likely have to replace her contribution with nannies, housekeepers, and possibly cooks. The ensuing financial strain would be difficult without a policy in place.
- I can always earn more money on my own than with universal variable options. These policies have an investment component that allows the insured to devote some of his premiums to investments. Although these investments are usually of modest risk, they are flexible and can accommodate policyholders who want the higher returns associated with riskier ventures.