Many people are uncomfortable thinking about their own mortality, allowing for a discomfort that enables life insurance myths and misconceptions to creep in and take root in your imaginations and taint your decision making process.
The utilization of life insurance products as a comprehensive tool for these certainties of life is less understood. One of the reasons for this is the myths surrounding life insurance.
There are many misconceptions and false information concerning life insurance. We are explores some of the most common life insurance myths, to help clear your doubts and gain knowledge that will enable you to make a sound decision. Because, unlike all the myths, Insurance is not an emotional decision.
Myth 1: No spouse, no dependents – no life insurance
The facts – Young, healthy, single people without children die every day and their burial and other final expenses including debt can be a burden on surviving parents, siblings and friends. Your aging parents or a disabled sibling may not be relying on you now but might need to in the future.
A popular variation of this life insurance myth is: I’m young and healthy so it’s a waste of money.
Life is naturally unpredictable and death, disability and illness don’t provide advanced word of their arrival. Having at least a minimal amount of insurance can go a long way to protecting you if you unexpectedly suffer an injury or illness that makes you uninsurable, and help you avoid this life insurance myth.
Myth 2: Life insurance is only useful after death
The facts – Life insurance is a risk management tool. Risk must not only be associated with dying but also with living too long. Advancements in medicine and science are prolonging life expectancy. If you were to live till age 90 and stopped working at 60, how would you manage your expenses?
Risk also concerns investments, which can be impacted by market volatility, bad financial planning, or lack of financial discipline.
Insurance can help you secure your financial future. There are various options that can help you build a corpus to make you financially independent during retirement, cover exorbitant medical expenses, or build your wealth. You will always benefit from a timely investment in the right insurance product basis your need – suitability assessment.
Myth 3: Term insurance is always the best choice
The facts – No single type of life insurance is better than any other under all circumstances and for everyone. Term insurance is for a specific period of time after which it ends.
Term insurance does not accumulate cash value, making it pure insurance which means it is lower in cost and ideal if your budget is limited or if you want added protection for a limited period of time.
Term insurance is not permanent and as time goes on your premium will increase each time you renew. Permanent insurance like whole life has a cash value component and a guaranteed premium for life. Whether it’s term or another type of life insurance it is best to have a mix of products that best meet your needs.
Term Insurance is one of the products that cover the risk of dying too early. Life insurance companies offer multiple products, like traditional savings products, unit-linked, and pension products to address the various risk management needs of varied customer segments.
So, evaluate your current and future financial requirements when evaluating the policy purchase.
Myth 4: Life insurance is too expensive
The facts – Life Insurance premium is the most versatile premium that can be found. It depends on multiple factors and can be adjusted to suit your premium paying capacity and gradually increased. The younger you are, the lower is the premium rate in any policy – be it pure risk or risk cum savings product.
The cost of life insurance, particularly term insurance, has fallen precipitously in the past 15 years. If you are a non-smoking 25-year-old you can get a $500,000, 20-year level term policy for 70 cents per day. A healthy non-smoking 40-year-old can get the same policy for about $1 per day.
Level premium term insurance does more than provide a death benefit. It protects your wallet if injury or accident changes your health status, causing your rate for new insurance to become truly too expensive. Don’t fall for this life insurance myth.
Term insurance typically provides a large sum assured for a very low premium. You can always start with a small investment and extend your coverage as your income and responsibilities grow across different life stages.
Myth 5: My company covers me, I don’t need another insurance policy
The facts – Your employer covers you only till you are employed with the company. The policy gets terminated once you leave or retire. If the organization has financial upheavals, they may even cancel the policy or reduce the benefits. In which case, you will be stranded when you need insurance cover the most.
Employee insurance may be sufficient when you are young, healthy, and without responsibilities.
However, it won’t be enough to cover your future family’s needs like children’s education, marriage, medical emergencies of aging parents, the rising cost of living, and so on. Secondly, the cover may only include a death benefit. This means you are on your own when you retire in case you do not have a financial plan in place to take care of your expenses post retirement.
It is advisable to supplement your employer-provided cover with another insurance policy that is customized to your future needs. Take a policy that can support you financially all through your living years as well as keep your loved ones financially secure in case something was to happen to you.
Myth 6: Investing is an alternative to life insurance
The facts – The first issue with this life insurance myth is that unless your assets are worth more than your debt you need life insurance.
Even if your assets exceed your debt does it do so by a large enough margin to serve the needs of your family? In the event you have more than $1 million of assets in excess of your debt life insurance may still make sense for tax purposes.
Savvy investors understand that investments are not stable and their value can rise or fall dramatically without regard for your needs or the needs of your survivors.
Life insurance on the other hand is stable and a $500,000 policy will pay $500,000 whether the stock market or the price of gold is up or down.
Product comparisons have to be made in a like to like manner. Would you compare a smartphone by breaking up its components into a phone, camera, hard disk, browser, etc.?
Similarly, Life Insurance products offer multiple features and much like a smartphone could be a combination of many features: mortality risks, morbidity risks, longevity risks, guaranteed returns, market-linked returns, whole life cover, amongst others. So, the comparison of standalone features may not give the customer clarity and a holistic perspective.
The distinctive features, however, are that the proceeds of most of the life insurance policies are tax-free. Life Insurance policies typically are long-term financial instruments, which offer competitive risk-adjusted returns vis-à-vis other asset classes, in the long run.
Myth 7: Can’t get coverage with less than perfect health
The facts – In most cases unless you have been diagnosed with a terminal illness you can still buy life insurance.
It is true that not all insurance companies will insure all you if you have certain ailments or conditions but there are others that will insure you.
Life insurance, like other types of insurance accesses the chances of having to pay a claim to determine the premium rate.
Insurance companies will classify your health on a scale with preferred at the top and substandard at the bottom. Your premium rate will be based on that scale.
Myth 8: Policy can only be in name of the person who buys it
The facts – Anyone with a regular source of income and who is not a minor can buy a policy, either in their own name or in the names of their spouse or children. Some insurers offer a joint insurance policy to cover both spouses under a single policy.
Parents can invest in a child plan to protect their children’s future needs. In case the child is a minor, once he/she attains the age of 18 years, the policy vests in the name of the child.
Myth 9: There are rules for how much life insurance I need
The facts – The only hard and fast rule for how much life insurance you should have is enough. In other words everyone’s situation is unique, including yours.
Rules, such as two years worth of salary are meaningless as a life insurance myth if you have two young children who will have needs that extend beyond two years.
Depending on your personal circumstance you should probably consult your accountant, financial adviser and lawyer in addition to an insurance professional to figure out how much insurance you actually need.
Myth 10: Only the family breadwinner needs insurance
The facts – This is a dangerous misconception as a life insurance myth because it ignores the value of a spouse or partner who does not work outside of the home. The duties and responsibilities of homemakers must be replaced when they are gone.
This is especially true in households with young children who will continue to need care after the death of a stay-at-home parent. Life insurance proceeds can be used to pay for things like child care and counseling that were not needed before.
Myth 11: My job provides enough insurance
The facts – Fewer and fewer employers are providing life insurance coverage as part of their benefits packages and those that do may greatly limit the amount of insurance they offer. Don’t believe the life insurance myth that your job provides enough insurance.
If you are fortunate enough to have life insurance coverage at work it is important to remember that your coverage will only be there as long as you work there. If you leave your job due to illness or injury and become uninsurable you will not have any insurance or be able to get any.
Myth 12: Everyone pays the same rate based on age
The facts – Several factors are used to determine how much you life insurance will cost, including your age, gender, health and in some cases your lifestyle. Don’t believe the life insurance myth that the premium is the same for people of the same age.
When health and age are the same women will have a lower cost for the same insurance as men. The reason is that women live longer and so are at a lower risk of premature death.
Your health plays a role in your insurance rate with healthier people paying a lower rate. Your lifestyle can also play a factor in how much you pay for insurance. Smokers will pay a higher rate then non-smokers even if they are in perfect health because smoking increases your health risks in the future. Other lifestyle choices that can result in higher costs are risky hobbies like mountain climbing or skydiving.
Myth 13: Why do I need insurance if I am young & healthy?
The facts – Life insurance is one product that cannot be bought when needed. It needs to be bought for a time when you need it. It is a very simple adage “you cannot insure a building under fire”. It must be bought much before you need it and there are many reasons for this.
The best time to purchase a life insurance policy is when you are young since the premiums are lower and you can avail of high life cover at very low premiums.
If you have a student loan or a personal loan, this loan can be protected from becoming a burden to your parents due to any risk of death, disease, or disability as you grow older, your policy can also protect your family commitments, or cover your health-related and retirement expenses.
Myth 14: I am not eligible for insurance because I am too old
The facts – We need to examine this in the context of the need for which the policies are being evaluated. Higher age can mean very attractive annuities and is a positive for these products.
In the case of a pure risk policy (term), the pricing of the products is done with average assumptions of health conditions.
So, when there are ages and medical conditions that are outside of the median/average, they will need to be priced to accommodate the higher risk. In case of certain outliers to the range, they may not be priceable risks.
It is also important to note that term policies are bought to protect loss of future earning potential.
Myth 15: Claim settlement is a hassle and the insurers can deny payout
The facts – An insurance company will pay claims on policies in existence. That is the fundamental purpose of the company. In this context, it is important to remember that the Insurance policy is a contract of utmost good faith. So, the policy is only as valid as the information provided by the customer. Additionally, the premiums need to be paid regularly to keep the policy valid.
The policy payout includes all types of death – illness, accident, old age, war, riots, natural disasters (like floods, earthquakes), except death by suicide during the 1st policy year.
Insurers are constantly adopting digitization in all their processes including the claims process to make it hassle-free.
Everyfamily and individual has their own distinct financial needs. What might suit one may not be the best option for another. It is advisable to consult an insurance advisor to find a plan that suits you best. You can also go online and compare different policies offered by different insurance providers before you make a decision. Insurance is an important investment and money well spent only if you find the right plan. You will understand the value it offers in the long run. Don’t let these common myths make you think otherwise.
Myth 16: Premiums are tax deductible
The facts – Federal and most states do not allow the cost of personal life insurance to be deducted from your income. The confusion with this life insurance myth comes from the fact that if you are a business owner and your life insurance is protecting the assets of your business the premiums are deductible.