Top 10 Life Insurance Myths
Mark P. Cussen
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. This article will briefly examine the top 10 misconceptions surrounding life insurance and the realities that they distort.
Myth No.1: I'm single and don't have any dependents, therefore I don't need any coverage.
Even single persons need 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. (Read Gifting Your Retirement Assets To Charity to learn more about these types of donations.)
Myth No.2: I only need an amount of life insurance coverage equal to twice the amount of my annual salary.
You need an amount of life insurance equal to the amount that is actually required. In addition to medical and funeral bills, you may need to pay off debts such as your mortgage and provide for your family for several years. A cash flow analysis is usually necessary in order to determine the true amount of insurance that must be purchased - the days of computing life coverage based only on one's income-earning ability are long gone. (Be sure to read our related article How Much Life Insurance Should You Carry? to learn how much - if any - insurance you really 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 well be enough. But if you have a spouse or other dependents, or know that you will need coverage upon your death to pay estate taxes or create an estate for charity, then additional coverage may be necessary if the term policy does not meet the needs of the policyholder.
Myth No.4: At least the cost of my premiums will be deductible.
Afraid not, at least in most cases. The cost of personal life insurance is never deductible unless the policyholder is self-employed and the coverage is used to insure the business. Then the premiums are deductible on the Schedule C of the Form 1040. (Read more about safeguarding your business assets in Asset Protection For The Business Owner.)
Myth No.5: I absolutely MUST have life insurance at any cost.
In many cases, this is probably true. However, persons with no debt or dependents and sizable assets may be better off self-insuring. If you have no debt and medical and funeral costs are covered, then life insurance coverage may be optional.
Myth No.6: I should ALWAYS buy term and invest the difference.
Not necessarily. The cost of term life coverage can become prohibitively high in later years; therefore, those who know for certain that they must be covered at death should consider permanent coverage. The total premium outlay for a more expensive permanent policy may be less than the ongoing premiums that could last for years longer with a less expensive term policy.
There is also the risk of non-insurability to consider, 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, which becomes paid up after a certain amount of premium has been paid and then remains in force until death. (To learn more on this argument, read Buying Life Insurance: Term Versus Permanent.)
Myth No.7: Variable universal life policies are always superior to straight universal life policies over the long run because of their long-term growth potential.
Many universal policies pay competitive interest rates, and variable universal life (VUL) 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, then the variable 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 to be paid in order to keep the policy in force. (Read Insurance to learn more about VUL policies and how they compare to other life insurance products.)
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, especially when it comes to cleaning and daycare. (For more information on this topic, see the article titled Insuring Against The Loss Of A Homemaker.)
Myth No.9: I should always purchase the return-of-premium (ROP) rider on any term policy.
There are usually different levels of ROP 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 other possible investment objectives. (Read more in Are Return-Of-Premium Riders Worth It?)
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. (Riders are available to provide additional benefits that help you customize your policy. Learn more about these riders in our related article Let Insurance Riders Drive Your Coverage.)
Myth No.10: I'm better off investing my money than buying life insurance of any kind.
Hogwash. Until you reach the breakeven point of asset accumulation, you need life coverage of some sort (barring the exception discussed in Myth No.5.) Once you amass $1 million of liquid assets, you can consider whether to discontinue (or at least reduce) your million-dollar policy. 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 without coverage for them, there may be no other means of provision after the depletion of your current assets. (For more information on providing for dependents, read Special Trusts For Special Needs and Protect Your Kids And Pets With Custom Insurance.)
Conclusion
These are just some of the more prevalent misunderstandings concerning life insurance that the public faces today. 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 advisor.
For additional reading on life insurance, check out Five Life Insurance Questions You Should Ask.
by Mark P. Cussen, CFP, CMFC
Mark P. Cussen has more than 15 years of experience in the financial industry, which includes working with investments, insurance, mortgages, taxes and financial planning. He has five of experience as a financial author and has written many educational articles for various financial websites as well as revising and updating training material for insurance and securities licenses. He has also worked in retail, discount and bank brokerage systems and is currently working as a financial planner for the U.S. military. Mark has a Bachelor of Science in English from the University of Kansas and completed his CFP coursework at the Bloch School of Business at the University of Missouri-Kansas City in August of 2001.
Read more: http://www.investopedia.com/articles/pf/08/life-insurance-myths.asp#ixzz1Pbbsoj9Q
October 6 2009
Seven Insurance Myths That Can Cost You
By CBS News
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(MoneyWatch.com) This story, by Arricca SanSone, originally appeared on CBS' Moneywatch.com.
Much of what you've been told about insurance is flat wrong. And common misconceptions and half-truths about insurance can cost you serious money. It's not your fault. Confusing jargon and the emotional baggage so often attached to insurance (no extra charge!) make this key financial topic rife with confusion. Here are seven common insurance myths and how you should really protect your family and possessions:
1. My Job's Disability Insurance Will Cover Me
You may believe that after an accident or illness your lost income will be covered through your employer's long-term disability insurance plan. Nope. "A typical group policy pays 60 percent of your salary up to a specified limit, such as $5,000 per month," says Brian Ashe, past chairman of the Life and Health Insurance Foundation for Education. What's more, group policies usually don't replace commissions or bonuses. Getting disability insurance right is essential since you have a one-in-three chance of becoming disabled and not being able to work for 90 days or more at some point in your career. And, not to be morbid, but becoming disabled is much more expensive for you than dying.
What to Do: Calculate how much you'd need to maintain your standard of living if you become disabled at Lifehappens.org. Then, if you're underinsured, see if your employer will let you buy supplemental coverage. Or look into buying an individual plan, which may pay up to 70 to 80 percent of your salary. Unlike group policies, the amount you get from individual plans usually is not reduced by other benefits, such as Social Security payments. Plus, if you purchase your own policy, disability benefits are not usually taxed (as they are if your employer pays for coverage).
Before you buy disability coverage, read the coverage explanation closely; some plans pay only if you can't work at all, while others kick in if you can't do your current job. The price varies depending on factors such as your occupation, income, waiting periods for benefits to begin, and optional features like cost-of-living adjustments. But a 45-year-old male accountant making $100,000 might pay between about $1,700 and $2,700 a year for coverage and receive benefits of up to about $5,000 a month. A 45-year-old female doctor with the same income and benefits could pay between about $3,000 and $4,600 a year, according to a survey of several large insurance carriers. (The female doctor pays much more because of her occupation and because women tend to live longer than men.)
2. My Homeowners Policy Will Cover Me
Maybe water in your basement or the engagement ring you lost is covered; maybe not. "Unfortunately, many consumers make a lot of assumptions about what's covered under a standard homeowners policy," says Kim Holland, Oklahoma insurance commissioner. "But you usually need additional riders for losses from events such as sewage backup, food spoilage from power outages, earthquakes, and wind damage."
What to Do: Review your policy when the renewal comes in the mail each year, especially the exclusions and limitations pages highlighting what's not covered. Even if your policy covers jewelry or collectibles, you may be limited to $1,500 total per claim - probably much less than adequate for the jewelry and art in your home. You'll need a separate rider to boost coverage for these items. Also, many policies won't cover things like a ring falling down the drain, so you may need a rider to protect against losses other than theft.
3. I Don't Need Long-Term-Care Insurance
You're reasonably healthy and figure long-term care is something only the elderly and infirm should consider. "But no one is immune to the effects of aging," says Brad W. Stark, CFP, of Mission Wealth Management in Santa Barbara, Calif. "Many people also mistakenly believe the government will help them if they need long-term care. But Medicare provides only short-term care after hospitalization." And Medicaid covers only the impoverished. An LTC policy can be a godsend, if needed, since a semiprivate room in a nursing home costs around $70,000 a year and assisted living runs more than $36,000 annually, on average, according to a recent MetLife survey.
What to Do: Look into long-term-care coverage in your 50s or early 60s; just watch out for the four biggest dangers of buying a policy. The price of a policy can vary enormously, depending on your health and the coverage you want. Someone between 55 and 64 might pay between $844 and $7,400 annually. Given the expense of these policies - not to mention the headaches if yours should prove inadequate when you need it - it might be cost effective to work with a fee-only financial adviser to help choose the right policy and a financially sound insurer.
4. Only Zillionaires and Glitterati Need Umbrella Coverage
This liability coverage shields your assets from lawsuit amounts exceeding your homeowners and auto insurance limits. For example, you're in a car accident and there's a settlement against you for $750,000, but your standard liability coverage is $300,000. "Umbrella policies are an added layer of protection in today's era of lawsuits," says Jim Barnash, CFP, of Stride Consulting in Chicago.
What to Do: Get an umbrella-coverage rider to your homeowner’s policy that's at least equal to your net worth. It's a pretty cheap way to buy peace of mind, especially if you own an expensive home or a business. Policies typically run just a few hundred dollars per million in coverage.
5. Low Deductibles are Best for Home and Auto Policies
Keeping your out-of-pocket costs low if you need to make a claim may sound like a good idea, but it's really not. For one thing, the lower the deductible, the higher the premiums. For another, "making a series of small claims may work against you in the long run if you're costing the insurance company more than you're paying in premiums," says Vickie Bajtelsmit, chair of the Department of Finance and Real Estate at Colorado State University. "Claims definitely increase the chance of your premiums increasing."
What to Do: Tell your agent to increase your deductible, and while you're at it, ask if you're eligible for a claim-free discount. Raising your deductible from $250 to $1,000 could save as much as 25 percent on your premiums.
6. I Need Enough Life Insurance to Cover Several Times My Income
Although the average amount of life insurance owned by policyholders is three times their income, if you have kids under 18, you'll probably need far more to keep your family afloat if you die. And if you have neither dependents nor a spouse who relies on your salary, you may not need life insurance at all.
What to Do: While calculators at sites such as Bankrate.com or Lifehappens.org give a basic idea of how much coverage you'll need, discuss your circumstances with a financial planner. And don't blithely assume your employer's life-insurance benefits will provide enough protection. You could change jobs, lose your job, or lose coverage if your company drops life insurance as a benefit. In any event, if you have children, you probably need a bigger policy than your company provides.
7. My Auto Policy Pays for a Rental Car After an Accident
Not necessarily. Rental reimbursement isn't included on all auto policies. And if you mistakenly think yours does, you could be severely inconvenienced if your car needs repairs after a crash. "The average car is in the shop for two weeks after an accident," says Loretta Worters, vice president of the Insurance Information Institute. "It can easily cost $500 or more to rent a replacement car for that time period." Also, if your car needs to be towed to a garage after an accident, your policy may not cover that either.
What to Do: Consider adding rental reimbursement and towing coverage, which may also pay for a flat-tire change, locksmith service, or battery jump-start. These inexpensive options usually run just a few dollars per month.
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