For most people, life insurance is confusing to deal with. Its terms and conditions can seem like rocket science to the uninitiated. Some people don’t have a clear understanding of how life insurance works. They end up believing various life insurance myths and make assumptions based on such myths. While understanding life insurance can be difficult for some, it is not impossible. You just need to know the technical jargon of insurance.
In this article, we will debunk the top 10 life insurance misconceptions so that the insurance buying process becomes easy and hassle-free for you.
Myth 1- I am Single and nobody is financially dependent on me. I don’t need life insurance coverage.
Fact- Even single individuals need sufficient life insurance coverage to look after debts, medical bills, and funeral expenses after their demise. In case you don’t have life insurance coverage, chances are high you might leave a burden of financial debts on the shoulders of your parents.
Additionally, buying life insurance can be an excellent option for low-income individuals who want to donate funds to their favorite charity or a cause that they support.
Myth 2 – It’s good to invest money than purchase a life insurance coverage.
Fact- Until you have reached the breakeven point of acquiring assets, life coverage is a must. When you have liquid assets worth 1 million dollars, then you can think about discontinuing/reducing the coverage of your life insurance policy.
In the early years of your life, if you depend entirely on your best investments, especially when your family is financially dependent on you, it could backfire in the event of your sudden demise. When you pass away without any insurance coverage, there will be no way of income replacement.
Myth 3 – In a long run, variable universal life plans are better than straight universal life plans.
Fact- Majorly, universal life policies offer a competitive rate of interest. Variable universal life policies come with various layers of charges related to the insurance as well as the securities component of the plan. So, if the variable in the plan doesn’t perform well, the policyholder might get lower a lower sum assured.
Additionally, even the unsatisfactory performance of the market can generate cash calls for variable policies. During such times, policyholders need to pay additional insurance premiums so that their policies can remain active.
Myth 4- My life insurance coverage should be the double of my salary.
Fact- It all depends on the insurance expectations of an individual. Every insurance buyer has different expectations, financial goals, and hails from a different financial status. As a result, different individuals need different insurance coverage features. You can use a life insurance premium calculator available online and easily calculate the amount of life insurance coverage that you need.
Myth 5- I should opt for the Return-Of-Premium (ROP) add-on on my term plan.
Fact- Typically, there are different types of Return of Premium riders available for different term plans. As per financial planners, this rider isn’t economical and you must avoid it. However, to include or not to include the rider in your plan depends on your investment goals and risk appetite.
With the help of a cash flow management and analysis, you can know better whether it is beneficial for you to invest the additional premium of the rider in other plan or exclude the rider from the plan.
Myth 6- The premium cost will be deductible.
Fact- In most of the cases, this isn’t true. The premium for personal LI (life insurance) can only be deductible if the insurance buyer is self-employed. Being a business owner, the purpose of buying insurance is asset protection. For such cases, the premium is deductible as per Schedule C of the Form 1040.
Myth 7-I don’t need to buy life insurance. I already have employer-provided term life insurance.
Fact- It all boils down to your financial goals. If you are a single individual, employer-provided term insurance coverage is enough for you. On the other hand, if you have a family who would need funds after your demise to pay for your funeral and other expenses, then you need a separate individual insurance coverage. You can buy additional coverage as per your financial circumstances.
Myth 9- I should always purchase term life insurance.
Fact- There are stark differences between a permanent vs term life insurance. The premium for term coverage can get expensive later on. Therefore, if you know that you definitely need life insurance coverage at the time of your death, opt for a permanent insurance policy. The total premium costs for a comprehensive permanent plan can be less than if you buy insurance early on in your life.
Myth 10– I’m not a breadwinner; I don’t need to buy life insurance policy.
Fact- If you believe in this myth, it could be one of the biggest reasons why your family might suffer after your demise. In case you are a stay-at-home mother, the expenses of the replacement of the services you provided can cost your family a bomb. Once you factor in the expenses of subscribing to the services of a daycare and professional cleaning services and all other miscellaneous expenses, you will realize the need for insurance coverage.
In a Nutshell
We have busted a few of the most prevalent myths revolving around life insurance. Now you know what the facts are. Before you buy life insurance, read as much as you can about it and as ask many questions as you want. The key to keep in mind is that the better you know about the plan, the more confident you will be. Eventually, it will leave no room for assumptions and myths. It will help you to make well-informed life insurance decisions.
That being said, If you have plenty of liquid assets to look after your family expenses, you might give buying life insurance a miss. But keep in mind, real estate rates changes overnight. There is no way of ensuring that you will always get the right price for your property. At times, your family might have to wait to get the right price and so it is your duty to ensure that you leave them with some financial security.