Life Insurance: 7 Myths Debunked
Life insurance is a product that has many facets. This opens up the arena for myriad misconceptions and myths and rumors regarding life insurance. Another important point to keep in mind is that once a life insurance policy is bought there is usually no turning back. If you have made a decision making mistakes then chances are that when the time comes your family and you may not benefit from the policy as you had originally thought. Basically there are seven basic myths that one needs to be aware of while taking on a life insurance policy.
The first is concerning your annual earnings – the myth is that you should buy a policy seven times that amount or thereabouts. What needs to be kept in mind is that every year 5% of the policy money should be accessible but without touching the principal. In figures this would mean that if you make about $50,000 annually and you buy a policy for, say $150, 000, and then your dependents will be able to take out only about $5000 every year. This may or may not be sufficient coverage. A good way to find out what your principle amount for a life insurance policy is to calculate how much money is required to maintain a certain standard of living which should include emergencies education and child care. Add all sources of income and the minus that amount from the expenses you calculated. The resultant figure is what you should buy.
Number two busted… People often get swayed by what they hear and one of the pitfalls of this is that you tend to get stuck on facts that may or may not be true. For example, there is a line of thought that indicated that the internet is better when it comes to buying life insurance than an agent. The internet is invaluable when it comes to research but at times the premium figures could be misleading. The rates quoted are based on the healthiest conditions and it is possible that figures on the internet any start off with an initial low rate and increase over the years. Besides rates you have to also compare the policy that you are getting so a better idea is to do your research on the net and then contact an agent who can give you competitive rates and the policy best suited to your requirements.
Three… One very popular myth is the one where it is thought that all policies are same only the charges differ. Remember that the policy is a contract between you and the insurance company which details what is payable etc. this means you must read and be aware of what you are getting and you must be aware of the various different features that each policy has. Little things like correctly spelled names and the correct numbers matter as does the fact that finally what is written is what counts and not what your agent told you over the phone.
Myth number four is the one where people have been led to believe that an estate beneficiary must be named. The flipside of this proviso is that in such cases the proceeds go through a probate meaning your policy proceeds may be tied up in legalese for a long time and there will be no money coming in during this period. It also means the value of your estate will increase which means the heirs then have to account for estate taxes and these can be as high as 48% so it is best avoided. Depending on your state you pay taxes if your estate is over $1.5.
Five…. A very common myth is that if you have bad health you are uninsurable. Not so. There are companies whose business is to provide insurance for that seriously ill or just recovered from an illness. It’s not cheap but it is available. If you hunt a bit and do some research you will realize that there are some companies that charge a standard rate while others may have surcharges. It is based more on company policy than your health.
Number six is the one where you should be aware that insurance agents know what you need. They don’t. There are some agents who have your best interests in mind but there are others who don’t. Keep in mind that different products command a different compensation for the agent and this compensation is what drives them to sell so you may be getting something not quite what you need but which has compensation benefits to the agent. Your CPA should be able to guide you on how much and what type of life insurance policy you require.
And last but not the least, disability coverage is not as important as life insurance – here is one factor that most people tend to neglect. Life insurance is a very integral part of any kind of financial planning but don’t forget that there are 50% more chances of you being disabled than dying at less than 50 years of age. Disability insurance is important especially where you find that generally a term life insurance has lower premiums and best suits requirements.