Here the top eight misconceptions about life insurance:
My family will be fine. Besides, I get 1x my salary from my employer.
Money aside, your family will not be fine. They’ll have a huge hole to fill without you there. I’ve seen surviving spouses immobilized with grief for more than a year. Adding financial ruin only makes things worse. Life insurance can keep the mortgage paid and food on the table while your survivors take the time to figure out what’s next.
Life insurance is too expensive.
Term life insurance – where you purchase a fixed death benefit for a fixed period of time – is very inexpensive. A 40-year-old non-smoking male with “Standard” health – a little overweight, taking a few prescriptions for high blood pressure and cholesterol – can purchase a $500,000 20-year term life policy for $662 per year. That’s about $55 per month. You can purchase more expensive policies that offer additional benefits, but plain-vanilla term coverage is dirt cheap. Why? Because the insurance company knows there’s a very slim chance they’ll have to pay a death benefit. Most term policies expire long before the policy holder does.
I’m too young.
It’s unlikely you’ll ever be healthier than you are today. The major cost drivers for life insurance premiums are age, health and duration (term or permanent). When you’re young and in good health you can lock in coverage at rock-bottom rates. A 25-year-old non-smoking male with “Preferred” health can purchase the same $500,000 20-year term life policy for $282 per year. He can also purchase a guaranteed universal life policy for $1,775 per year. Why so expensive? Because as long as the premiums are paid on time somebody is going to cash a $500,000 death benefit check when you die. The insurance company has to collect enough premium to pay for that.
I’m too old.
Perhaps. We all acquire a few dings and dents as we get older and it’s likely that you won’t qualify at the same Super Preferred rates as your adult children. The question really is whether you need insurance to achieve your financial objectives. I have secured coverage for a 74-year -old woman whose children collected a tax-free death benefit when she died at 86.
I should just invest the money I would pay in premiums.
Life insurance and investing aren’t EITHER-OR. You need life insurance AND you need to invest for the future. If you’re a diligent saver and investor there may come a day when your investment portfolio equals your death benefit and you can re-evaluate. But it’s unlikely that a 35-year-old mom or a 45-year-old dad have had time to invest enough money to replace their earnings and care for their families if they die unexpectedly.
Buy term and invest the rest.
This is a variation on just investing the money you would pay in premiums. And it’s true that term insurance is usually the cheapest coverage out there. The question is, will you still need insurance coverage at the end of the policy’s term? Will you have built up enough savings to replace the death benefit? Which leads us to…
I won’t need life insurance after my kids turn 18.
It’s true that for most families, their greatest need for life insurance is when their kids are young. If one parent dies suddenly the surviving spouse may need years of support to replace lost income and pay for college educations. Term life insurance can inexpensively fill the gap, and you can choose a term that ends when your youngest child graduates from high school or college. But take the time to assess what your family’s situation will be when the term insurance runs out. Will there still be college educations to pay for? Do you have a special-needs child to plan for? Will there still be a mortgage to pay off? For the average 30-year mortgage, you’ll still owe about half of the balance at the 20-year mark.
I only need to own one life insurance policy.
For all of the reasons listed above, along with the Top Seven Reasons To Own Life Insurance we covered in another blog post, you probably need to own more than one life insurance policy – perhaps several. Here’s an example. Jessica owns a business with her partner, Nicole. Jessica’s husband, Matt, works as a supervisor for a local company and has no interest in working in Jessica’s business. Jessica and Matt have two children, ages 4 and 7, and they recently purchased a home with a 30-year mortgage. What might their life insurance needs be?
- Replace Matt or Jessica’s income long enough to get the kids through at least high school. In this case, a 15- or 20-year term policy fills the need.
- Pay off the mortgage. How much will still be owed on that mortgage in 20 years? About half.
- Buy out Jessica’s interest in her business from Nicole. If Jessica suddenly dies, what happens to her half of the business? And what happens to Nicole, who has lost her business partner? A buy-sell agreement, funded with life insurance, can make Matt whole for his ownership in the business. It gives Nicole operating cash to move forward without Jessica, and it ensures that she isn’t stuck with Matt as a business partner. She never really liked him anyway.
In Matt and Nicole’s case, they probably need at least five life insurance policies:
- Twenty-year term policies on each of them to get the kids raised.
- A permanent policy on each of them for half of the mortgage balance. This has the added benefit of enhancing retirement income for the surviving spouse.
- A permanent policy on Jessica’s life, with Nicole as the owner and beneficiary. Under a buy-sell agreement, Nicole could use some of the proceeds to purchase Matt’s interest in the business and the remainder as working capital while she moves forward without her partner.
The Top Eight Misconceptions About Life Insurance
Author Brian Stallcop, a Certified Financial Planner™ in Bend, Oregon, has been helping clients plan secure futures for more than 20 years. If you have a topic you’d like to see addressed in a future blog post, submit a comment below or drop him a line at [email protected].