Life insurance is an important part of your family’s security – too important to make decisions based on hearsay and myths. Consider these five life insurance myths, along with a discussion of why they are myths.
- Your Insurance Coverage from Work is Enough – Employer-provided life insurance has many limitations, and provides insufficient coverage for most families. For example, does it cover only job-related situations or death by illness as opposed to accidental death? Do you have debts that need to be maintained, such as a mortgage?
If you have dependents, your work coverage is unlikely to cover all the living expenses that your family will need in the longer term – and maybe not even in the short term..
- Stay-at-Home Spouses Do Not Need Life Insurance – This is a particularly persistent myth, and it is borderline insulting – because it implies that the stay-at home parent does not have enough value to be worth insuring. If you are the breadwinner and your spouse passed away, how would you handle all the auxiliary expenses you would require for child-care and other household management issues?
Even if you do not have children, there are going to be expenses associated with the passing of your spouse that makes life insurance a good idea..
- Life Insurance Needs Should be Based Solely on Salary – A common myth is that you should insure yourself to some multiple of your salary (although not everyone agrees on the multiplier). However, your salary does not necessarily equate to the potential losses and expenses that your family will deal with should you pass away. Families have different risks to consider, and your number of dependents, available assets, and other personal factors may be significantly different from your co-worker with the exact same earnings.
In short, your insurance needs should also be based on the assets you have to protect and the needs of your dependents – not just your salary..
- Single People Have No Use for Life Insurance– You may not need as much life insurance as someone with dependents, but someone has to cover the cost of your funeral and certain auxiliary debts. Your parents or other family members would have to deal with monetary issues as well as the personal loss.
Even without family, you may have reasons to buy life insurance as a single person. For example, you may prefer a permanent life insurance policy for the investment component, or you may want to name a charitable organization that you support as your beneficiary.
- There Is a Single Best Form of Insurance – Blanket statements are sometimes thrown around between pundits or vendors of life insurance products claiming that a specific form of insurance is superior to others for cost, coverage, or the best combination of the two. Term life is often described this way. While this may be true for some, it is not for all. Of all the myths about life insurance, this one is most egregious. First, anyone offering life insurance could easily start with the needs of the buyer and let that set of needs point them to the right product. When reversed, however, it amounts to not asking questions and then assuming that the product recommendation is a good one because of a personal preference. It also lets consumers who are not advisors continue down a path of assumptions without objective guidance.
For example, consider the statement that term life insurance is always preferable to whole life insurance because of the costs and relatively low returns on the investment component of a whole life policy. This is true for many people, but not for all. Some insurance customers enjoy the relative peace of mind of a whole life policy and are willing to pay for it.
The common thread in these myths is the implied notion that insurance is an impersonal, off-the-shelf purchase. On the contrary, a good insurance policy should be tailored as much as possible to your needs. Whether you choose term life or some form of permanent life insurance, the point is that you evaluate your options and find the one that fits your situation. Take your time, because it is an important decision.