Top Five Life Insurance Myths
By Lori Morrell
The general public may hold various levels of misunderstanding concerning the value and the purchase of life insurance. Perhaps while reviewing the top five myths you can discover if you have heard people say some of these phrases. If it is someone you depend on, it may be time to review your family's situation.
1. I have enough life insurance through work.
The number of employees with life insurance benefits at work has declined from 56% to 48% today.* Many employers offer just a nominal amount such as $10,000-$50,000 as a benefit. Some larger employers may offer a multiple of salary such as 2 to 3 times your salary. Frequently there is an opportunity to buy more coverage during the annual benefits open enrollment. This may be cost effective or it may be cost prohibitive. Take the time and apply for coverage on line six months before open season so that you may have an actual offer from a low-cost term life insurance company to compare to your company's plan.
People who have adequate coverage at work lose that coverage in the event of a layoff or downsizing. Thinking that this is the time to apply for low-cost term, many of the unemployed apply for coverage on the internet or with their family insurance agent. Their application for coverage may not result in a life insurance policy. Insurance companies review an applicant's current employment and salary before making an offer. Life insurance coverage is considered to be the protection of an income in the event of a breadwinner's death. If there is no income to protect, an applicant may be declined.
2. Most people have enough life insurance to protect their families.
Twenty-two percent of American households do not have any life insurance coverage at all. That is 48 million households.* Many households do not have enough coverage—forty percent of American households believe they do not have enough life insurance to continue in their current life style.*
3. Life insurance creates tax problems for beneficiaries.
Actually a life insurance death benefit is tax-free for most households. It has been this way since the initiation of the federal income tax in the early 20 th century. Life insurance proceeds are viewed as a way to avoid loss of property and poverty for families and therefore the money is usually tax-free.
4. Few die in the United States and life insurance plans just don't pay.
In 2002, 577,456 individuals ages 20-65 died. In the year 2000, $44 billion was paid to beneficiaries in the form of death benefits. Life insurance is highly regulated. When people die, life insurance pays.
5. Life insurance has grown too expensive.
Actually, term life insurance has never been cheaper than it is right now. In the last eight years, premiums have fallen significantly. This has been due to computerized automation and productivity gains by the life insurance carriers, higher risk retention and streamlining distribution channels. There has also been an improvement in mortality experience, due to advances in underwriting standards. There has been significant market pressure to keep rates low, since these rates are advertised on television and the internet. Cash value or permanent life insurance has grown less expensive as well, due to the improvements in process and experience. Overall, many term life insurance plans can be had for pennies a day.
* LIMRA International, Facts about Life Insurance 2005
US death numbers from the CDC, http://www.cdc.gov/nchs/FASTATS/deaths.htm