“On a long enough timeline, the survival rate for everyone drops to zero.” — Chuck Palahniuk
Many people consider life insurance to be the “black sheep” of the personal finance world. While products like auto insurance or homeowners insurance tend to protect tangible assets and offer returns the policyholder can directly benefit from, life insurance seems to only benefit others. No one wants to think about their death, and buying a product that only your survivors can use seems morbid or impractical.
The reality is that life insurance can offer many benefits, some of which can be tapped while you are still living. Life insurance also protects the ones you love most from having a financial burden on top of their emotional hardships. One simple purchase can be an affordable way to avoid encumbering loved ones and squandering your financial legacy in the event of the unexpected.
To help educate people and make their decision easier, here are some of the most common misconceptions:
Almost everyone can benefit from some form of life insurance. Funeral expenses and medical costs rise each year, and passing on without some sort of policy will leave your beneficiaries strapped with debt. You may also pass with some debts of your own.
Simply put, life insurance is necessary to protect the ones you love. Whether that comes from self-insurance, an investment portfolio, a term policy or a whole life policy, you will want a way to avoid creating a costly “legacy” upon passing away.
Life insurance often gets a bad rap because people are convinced into buying forms of insurance they do not need. Remember that not every insurance salesman is a Needlenose Ned trying to make a quick buck. Educate yourself about the services you need and find an agent you trust to pay only for coverage that provides worthwhile benefits.
Just like assuming that life insurance is impractical for everyone, assuming everyone can benefit from it is also misguided. People with significantly more liquid assets than debts can self-insure, and people who are very young and healthy, like children and college students are usually better off investing in other forms of financial protection.
People who have graduated from college or who are already working full time have begun amassing assets, and they will also likely have significant debt at this point in their life. As soon as you have enough money to afford life insurance, then you should begin considering a policy. People with spouses, children or other dependents should definitely think about finding a life insurance policy to protect their families from financial ruin.
The fact is that when you are healthy is the best time to buy life insurance. 20-year term life insurance can cost as little as $30 a month — less than $1 a day when you are under 30. Waiting longer to purchase a policy will only cause your premiums to increase, especially since the likelihood of health problems increase, too.
On top of all this, you never know when your time could be up. To rephrase the Chuck Palahniuk quote above, life has a 100% mortality rate.
Having life insurance as part of your employee benefits is great, but it is usually not enough coverage for all of your posthumous expenses. Employer-paid policies usually only cover one to two years’ salary or an even more modest flat amount. Insurers recommend you have at least 6 to 12 times your annual salary to cover related expenses and income replacement for dependents.
Employer policies also end when you leave the company. You may have the option to convert the policy upon leaving, but they are usually more expensive than a typical personal policy will cost. Buying a personal policy at the start of your employment will ensure that your rates will be locked in low and that you will have coverage in the event of unexpectedly losing your job.
Your funeral expenses, medical bills and any debt you leave will transfer to your next of kin. This fact is why life insurance should be used to protect other people you love, not just the ones who depend financially on your income.
Even if you are technically not the “breadwinner,” you still bring in important income or services to the household. Stay at home parents provide services that will need to be supplemented or replaced in the tragic event that they pass on. Furthermore, surviving parents statistically end up earning less after the death of their spouse since they take off work or change jobs in order to help their family adjust.
Buying term life insurance, especially at a young age, will help you find a low cost plan that can carry with you for 20 to 30 years or more. You can also compare quotes to find the minimum coverage you need at a very affordable price.
There are many plans that are flexible to your health needs and lifestyle. You can also take steps to improve your health in order to reduce your premiums at the time you apply.
Even high-risk people can find special policies that may cost more, but provide substantial benefits to the policyholder. Make sure to be truthful up front to your insurance provider to find the best policy for your needs and avoid penalties like premium increases or cancellation.
Only employers are eligible for tax deductions based on the current tax code. People who are self-employed and have life insurance coverage for business-related expenses can usually deduct premiums on Schedule C of Form 1040.
Lifestyle for life insurance policyholders is vigorously examined according to risk assessment projections. Factors like weight, smoking, occupation or geographical region can all affect premiums. Even something like having a scuba diving hobby can cause your policy to become more expensive. Proving you exercise regularly can sometimes have the opposite effect.
Make sure you disclose all factors to your insurer before completing the policy. Lying about factors like smoking or driving a motorcycle can be unearthed when the insurer sees your medical records or that you have filed for a motorcycle under your auto insurance coverage.
Term life insurance is usually affordable and works great for most policyholders. Those that can afford the higher premiums of whole life insurance should not rule out the possibility, though. Whole life provides financial benefits while you are still alive, and it can become a welcome addition to any investment portfolio.
Another plus for whole life insurance is that premiums are locked in. Having your 30-year term life policy lapse when you turn 65 will likely cause you to have to renew at a much higher rate.
At the same time, people with more liquid assets than debts can often afford to self-insure by the time they reach a certain age. For many people, investing the difference in premiums between whole and term insurance can better prepare them for end-of-life financial stability in certain circumstances.
Having $700,000 or more in mutual funds on top of savings can often be enough to prepare for an unexpected death. However, people should be sure that they have arranged for their family to be able to afford estate taxes, and they should be able to pre-pay for costs like funeral arrangements when they reach retirement age.
Return on premium riders guarantee you reclaiming your premium expenses should you be still alive when the term policy period ends. These riders are often quite expensive, and they are subject to unexpected costs. Even if someone were able to reclaim 100% of their premiums after the term policy ended, they often could have used the cost difference to invest more effectively.
Review your financial situation and long term expectations with a financial planner to determine your risk tolerance. Projections like cash flow analysis can help you come to the decision of whether or not an ROP policy would be right for you.
You may find the cheapest quote from online insurance sales sites, but there are often many hidden costs. For instance, the policy could not cover as much as it should, or abysmal customer service could make the savings not worth the eventual headache.
The best bet for most people would be to compare quotes from real insurance agents or brokers and find a plan that has the terms and service they want. You can enter in your ZIP code here to get in touch with multiple life insurance agents and find the policy you want at rates you can afford.
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