7 myths surrounding life insurance
When it comes to life insurance, even
smart shoppers can get tripped up by myths and misperceptions.
Unfortunately, any mistake you make when buying a
life insurance policy can have long-lasting consequences. And if
your family is not provided for the way you intended, you won't
be around to fix it.
You may not have a second chance to make the right
decision. To choose the life insurance that's right for you, steer
clear of these seven most common myths surrounding life insurance:
Myth #1: Savvy wage earners should buy
seven times their annual earnings.
You may think that because you've followed some
rule of thumb that says you should have four, five, seven or some
other multiple of your annual income, that your insurance policy
will be enough to provide for your loved ones.
That may or may not be the case. Consider this:
The average American has a policy for about three times his or her
annual income, says David Woods, president of the Life
and Health Insurance Foundation for Education, in Washington,
D.C. Many financial experts say that as a general rule of thumb,
you can withdraw about 5 percent each year from the earnings on
a sum of money before you have to touch the principal.
So, if you're making $60,000 annually and purchase
three times your annual income, or a $180,000 policy, your heirs
would be able to safely withdraw only $9,000 each year. "As
a general rule, people underestimate how much life insurance they
need to generate enough proceeds to adequately support their beneficiaries,"
says Mario C. Giganti, CFP, CPA and managing director with Azsure
Fiduciary in Uniontown, Ohio.
To calculate how much insurance you'll need, estimate
how much your heirs will need to maintain their lifestyle without
you. Don't forget to include additional costs they may face in your
absence. If you've got young children, for instance, child care
costs likely will rise. You also may want the policy to help fund
their college education. For more help visit Bankrate's
Then, add up all other sources of income, such
as your spouse's salary or pension, and any Social Security or other
government benefits for which they would be eligible. Your life
insurance policy should help close any gaps.
Myth #2: The best deals are
obtained over the Internet, bypassing agents' commissions.
"I bought over the Internet, so I must have gotten a
The Internet is a great place to shop
around and check prices. However, you can't assume that you've automatically
gotten the lowest price. "If you find a good, reputable agent
and they do the job, they'll find a competitive rate that's comparable
to what you can find online," says Giganti.
What's more, the premiums posted on some Internet
sites can be misleading. For instance, they may post a rate that
few people will qualify for. Or, they may promote an initial rate,
and neglect to mention that the premiums will increase over the
term of the policy.
In addition, simply comparing rates won't tell
you how well the policy fits your needs. "One downside to buying
online is that the consumer may not a do a sufficient job of assessing
(their own) needs," says Bob Puelz, professor of insurance
at Southern Methodist University in Dallas, Tex. Before shopping
for prices, figure out how much coverage you need, and what type
of policy will work best.
Myth #3: Except for the amount, all insurance
policies are the same.
"I don't need to read the policy,"
many people say. "Besides, I wouldn't understand it."
Wrong. Your life insurance policy is a contract between
you and the insurance company. It spells out what you need to do
to obtain and maintain coverage.
It also will identify situations in which the insurance
company won't cover a claim. This may happen, for instance, if the
policy holder commits suicide within a year or two of the issue
date. It also should indicate whether the premiums will remain the
same during the term of the policy.
Finally, you'll want to verify that the policy accurately
reflects the information you supplied in your application. Is the
name of the beneficiary correct? Mistakes could cause problems later
Granted, sitting down to review an insurance
policy doesn't sound like much fun. However, it's worth the time.
Myth #4: The smart move is to name your
If you do, the proceeds of the policy then have to go through probate,
says Michael Horbal, president of LifeInsuranceAdvisors.com, LLC
in Newtown, Pa. Probate is the process by which the courts verify
that a will is valid. Depending on the size of your estate, probate
can take several months or a year or more. During this time, your
heirs wouldn't be able to access the proceeds from your policy.
In addition, including the proceeds in your estate
will increase the value of your estate, which may mean you'll have
to pay estate taxes. If your estate is valued at more than $1.5
million, you'll probably have to pay estate taxes, says Julie Welch
Runtz, CFP, CPA and director of tax services with Meara King &
Company, in Kansas City, Mo. Given that estate tax rates can hit
48 percent, you'll want to do all you can to avoid them.
Myth #5: People in poor health
can't get insurance.
Don't assume that you won't be able to get coverage
because you're living with a serious illness, such as diabetes or
heart disease. "A lot of companies specialize in this type
of coverage," says Horbal. "It may be more expensive,
but you can get it.
Even if you've been declined by one company,
that doesn't mean other insurers also will decline coverage. What's
more, one company may cover you only if you pay an added surcharge,
while another may charge you its standard rate. For instance, one
cholesterol reading might give you a standard rate with one company
yet qualify you for a preferred rate with another, notes Horbal.
"You really need to shop around."
Myth #6: Insurance agents are experts in
determining what you need.
Many life insurance salespeople and other financial
professionals truly look out for their clients' best interests.
However, it's important to remember that some are compensated differently
for selling different products. That may influence which products
For instance, some agents work for companies that
sell only permanent insurance, such as whole or universal life.
As a result, they're less likely to recommend other types of insurance,
such as term policies. "Cash value (whole life) polices often
are pushed heavily by companies that don't compete in the term market,"
If you need help, a CPA familiar with your financial
situation is probably your best bet for advice on what type and
how much life insurance you should buy.
Myth #7: Life insurance is
far more important than disability coverage.
Many people are aware of the importance of purchasing life insurance.
They're less likely to recognize how important it is to purchase
disability insurance. That can be a big mistake. If you're
under age 50, you're 50 percent more likely to be disabled for a
period of time than you are to die, says Giganti. "Most people
underestimate the fact that they could become disabled."
Given the odds, most people will find that it makes
sense to purchase term life insurance, which is less expensive than
permanent. Then, they also need to purchase disability insurance.
Karen Kroll is a freelance
writer based in Minnesota.
-- Posted: July 28, 2004