We have discussed life insurance basics.
If you didn’t read that content, we encourage you to do so and familiarize yourself with the principles of life insurance before we talk about the myths that constantly swirl around it.
Why are there myths? First, there may be a lack of education on current life insurance products and misinformation based on life insurance products that existed decades ago. Another reason is that many of us have gotten financial advice passed down from our parents, grandparents or great-grandparents who, due to the times that they lived in, may not have had much in the way of assets to protect, or they were ill-informed about life insurance. Myths develop when there is a lack of understanding, education and facts.
Today, however, life insurance is an important pillar in any long-term financial strategy.
Here are seven common life insurance myths and the truth behind them.
If you have any type of debt, such as a car loan, a house, student loans or medical bills, and you pass away, that debt will still have to be paid, most likely by a family member. Also, the burden of funeral and burial expenses would fall on a family member or friend. According to the National Funeral Directors Association (NFDA), the average cost of a basic funeral today is approximately $7,500. Even a basic policy to cover funeral and burial costs can lift that financial burden from others.
Life insurance provided through your employer as a part of your employee benefits is generally in the form of a group life policy. Actuaries or analysts from the life insurance company consider a variety of factors to determine a monthly or annual cost per employee for a group life policy. These factors can include geography, job risks, disease rates, number of individuals covered and more. This is usually done without any type of medical examination. While these policies are generally inexpensive and often covered in-part or entirely by your employer, they are only in effect while you are employed there. If you quit or are terminated, that life insurance coverage goes away. In other words, group life insurance provided by your employer is not “portable.” Therefore, you may want to consider taking out a term or whole life insurance policy separate from any group policy you may have in place. For example, if you have a $100,000 group life policy through your employer and you also have a $200,000 policy of your own, should you pass away while employed, your beneficiary will receive $300,000. If you were no longer covered under the group policy, your beneficiaries would still receive a $200,000 benefit.
This myth is mostly fueled by individuals who may not understand life insurance and the benefits cash value, whole life insurance has on a financial strategy.
As a reminder, term life insurance only lasts for a set period of time, such as 10, 15 or 20 years. It is generally more affordable and may be a good option if you are young and in good health. But because it only lasts for a defined number of years, when the policy lapsed you would have to get a new policy in order to continue coverage, which will likely be more expensive because you are older. At that time, your premium could increase significantly, or you could be denied coverage altogether due to any health issues may have.
Whole life insurance, while typically more expensive, lasts your entire life; premiums don’t increase; and you don’t need another medical exam 10, 20 or 30 years down the road. Also, whole life insurance has a cash component, meaning that it accumulates a cash value over the life of the policy. You can take out very low-interest personal loans against that cash value for whatever reason. However, if you don’t repay that loan, the amount of the death benefit will decrease by that outstanding amount. The cash value of your whole life policy cannot fluctuate nor can your premiums increase due to the economy.
If you believe the myth about purchasing a term life policy and investing the difference, you could potentially take a hit financially. You would have to be extremely disciplined to save that difference each and every month for the next 30, 40 or 50 years. Investing does carry some level of risk, whereas life insurance is not affected by fluctuations in the stock market. A financial professional can help you find the right options for your current situation and future financial goals.
If you are a stay-at-home parent, many of the tasks and jobs you do around the home have significant value. If you have children and something happened to you, your spouse would have to pay for childcare. The same is true for many other tasks that a surviving spouse would have to cover, at least for some period. These include jobs such as housecleaning, lawn maintenance, meal preparation, and more. Everything you do to take care of your home and family, even if you don’t have a paying job outside the home, has monetary value.
Many people think that they only need a life insurance policy that is equal to twice their annual pay. This is because that multiple is what many employers provide in group life insurance policies. The fact is, you may need a policy with a death benefit of 10 times your annual pay, or more. This is especially true if you have a family, mortgage, car payments, college loans and other debt. In determining how much coverage you need, it’s important to look at your current expenses, like your mortgage and current debt. Also consider potential future expenses, for example college tuition for a young child. If you earn $75,000 a year, a $750,000 life insurance policy could cover current and future financial obligations and provide financial comfort to your survivors.
As an individual, you cannot take a tax deduction for the life insurance premiums you pay annually. However, if you are a business owner and you pay the premiums for your employees as part of their benefits package, you may be able to take a business tax deduction; it’s always wise to check with a business accountant or tax advisor. While your personal premiums are not tax deductible, you can rest assured that in most cases, your beneficiaries will get the full amount of the policy, minus any loans that they may have taken out against the policy. If you're the beneficiary of a life insurance policy, the IRS says you don't have to report the amount received as income when you file taxes.
As the landscape changes for life insurance, it is somewhat easier for older individuals and people who have health issues to get life insurance coverage. While it may be more costly, many life insurance companies offer both term and whole life policies for people in their seventies, eighties and older, especially if a health exam reveals they are in relatively good health. Additionally, some companies may not require health exams which may be an option for those with underlying health conditions. The most common and easy policies to obtain, whether you are older or have underlying health conditions, include no-medical-exam policies, simplified issue, guaranteed issue and funeral policies. Most life insurance professionals can help you find the policy that’s right for your current situation.
These are just a few of the many myths and misconceptions about life insurance. The main purpose of life insurance is to protect your assets and provide for your survivors in the event of your death. Some policies are very basic while some are more complex but provide you and your beneficiaries with better benefits. The bottom line is to take your friends’ and family’s advice with a grain of salt, and instead, turn to a financial professional who can provide you with facts and present you with a variety of options.
USA Swimming and OneAmerica have come together to offer you access to a financial professional, at no cost to you. A financial professional can help you create a personal economy including assistance creating a budget that takes into consideration your lifestyle and may help you achieve your short-, mid-, and long-term financial goals.
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