Both term and permanent policies have left people with differing perspectives and beliefs about life insurance policies.
Life insurance is meant to serve several purposes, but its most important function is to replace those earnings that would come to an end when the insured dies. Before agreeing to the terms and conditions of a life insurance policy, and signing on the dotted line, there are many factors to consider.
But there’s something about life insurance that just freaks people out. For one, it makes them face the notion of dying. Secondly, it demands that they anticipate what tomorrow will bring. Instead of making a decision, they often just continue ignoring the unpleasant facts.
“People procrastinate,” says Georgette Geller, divisional executive vice president at Axa Advisers. “They are in denial about thinking about their future. Death is not on their minds, buying life insurance doesn’t give them an immediate tangible return and most people are undereducated about the topic.”
This lack of knowledge adds fuel to the fire of myths that take on a life of their own.
It’s not surprising then, that according to the Life and Health Insurance Foundation for Education (LIFE), 40% of adults in the U.S. have no life insurance.
Below are a few common myths you may have heard.
Life Insurance Is a Good Investment
“Life insurance, a good investment? Total fantasy,” says life underwriter and director of financial preparedness for the insurance consumer group United Policyholders Tony Steuer. “I liken life insurance to the casino industry,” he says. “How do you think they get these big, flashy buildings and these solid financials? Not by giving you this really great deal.”
Every few years, the industry switches up its tactics of offering sound financial reason for you to “invest” in a life insurance policy.
Consumer Federation of America expert James Hunt predicts that the current sales pitch that touts tax deferrals on the cash value buildup within permanent life policies will turn out to be merely wishful thinking for many “investors.”
“The problem is that 40 percent or 50 percent of the buyers drop out within 10 years and never get a good return on their money,” says Hunt. His recommendation is to buy term life insurance and stick the savings in your 401k instead.
“Insurance is insurance; it’s not an investment vehicle,” Steuer adds.
Your Health Doesn’t Matter
You may have heard that people in bad health or who happen to be smokers cannot obtain life insurance. This is far from the truth.
Insurance agencies assign applicants into specific categories based on their lifestyle, habits, health, and medical history, among other factors. If an applicant gets placed into a high risk category, premiums are going to increase. Those who are in good health will pay excessively lower premiums than people who have an illness or smoke.
But it is not recommended that you buy into low-cost, no medical exam, guaranteed-issue life policies that are offered through advertisements.
“For the first two years, the death benefits are minimal,” Hasenauer says. “That two-year window is the suicide period, the contestability window where the company would contest that the information you provided was not correct,” says says Judith Hasenauer, a Chartered Life Underwriter.
If You’re Single, You Don’t Need Coverage
Every policy out there can be customized to fit an applicant’s need. If you happen to be single and have unpaid debt (credit card bills, mortgage, etc.), a life insurance policy can cover these costs when you pass on. No one wants to leave the burden of paying of debt on their family after they die.
Business partners should also look into purchasing a policy, so if one passes away, the incurred losses can be covered.
Life Insurance Policies Costs Too Much
Actually, policies are far cheaper than the average consumer thinks. This depends on your age, health and size of the death benefit you want. The younger and healthier you are, the lower your premium will be.
“The cost of simple level term insurance has come down by more than 60% in the past 16 years, so the prices today are so low, you can afford all you may ever need,” says Byron Udell, CEO of Accuquote.com, which helps people find affordable term insurance.
As a ballpark, DailyFinance.com explains that a healthy 40-year-old man who buys a 20-year level term policy with fixed annual premium, might pay $350 a year to secure a $500,000 death benefit. A healthy 50-year-old man who buys the same policy might pay $1,000 a year. If he waits until he’s 60, the policy will cost about $3,000 a year.
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