It is complicated, regardless of whether you are buying term or whole life insurance. Determining the proper type and amount of coverage can be overwhelming without the help of an insurance professional. Trying to understand how much coverage one needs or why they need it, then understanding the technical aspects of a life insurance policy can be overwhelming so I thought I would address the top 5 myths about life insurance that many people believe.
Myth #1: My Term Life Insurance Coverage at Work Is Enough
Maybe, maybe not. If you have a spouse, dependents, or tax needs then additional coverage may be necessary. However, for a single person of modest means, employer-paid or provided term coverage may actually be enough.
Myth #2: I’m Single and Don’t Have Dependents, So I Don’t Need Coverage
I am a firm believer that even single persons need at least enough life insurance to cover funeral costs. Additionally, I believe that everyone should have enough life insurance to cover the cost of personal debts and unpaid medical bills at a minimum. If you are uninsured, you could potentially leave a legacy of unpaid expenses for your family or executor to deal with.
Myth #3: My Life Insurance Coverage Only Needs to Be Twice My Annual Salary
There is no cookie cutter answer for this. The amount of life insurance each person needs depends on their specific situation. 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 to help determine the true amount of life insurance you should consider purchasing.
Myth #4: The Cost of My Premiums Will Be Deductible
Sorry to burst any bubbles on this one, but in most cases that is not true. The cost of personal life insurance is never deductible unless the policyholder is self-employed AND the coverage is used as asset protection for your business. You would need to speak with your tax professional to determine if your life insurance premiums would be tax deductible.
Myth #5: Buy Term and Invest the Difference
Once again, there is no a cookie cutter answer or approach for this. There are distinct differences between term life insurance and permanent life insurance and those differences can become even greater, depending on the company you purchase from. One thing is certain though, the older one gets, the higher the costs of term insurance becomes. If you know for certain that you must be covered at death, then you should consider permanent life insurance. I would also suggest comparing total premiums over the length of time you feel you need coverage so you are able to see the lifetime expense. Please do not be fooled and not address the insurability factor once your term policy expires. The risk of not being insurable later in life could be disastrous for those who may have estate tax issues and need life insurance to pay them.