5 common myths about life insurance needs
Do you have enough life insurance to support your family should something happen to you? This is a question I recently received and unfortunately a lot of people have no idea. After all, death and pushy life insurance agents are two things most people would probably rather not deal with.
Yet it is an important question. If you don’t have enough life insurance, you could leave your family in dire financial straits. On the other hand, you could end up wasting thousands of dollars on something you don’t really need if you buy too much of it. When determining how much life insurance to buy, here are some common myths to avoid:
1. Everyone should have life insurance.
Life insurance has two main functions. The most common is supporting people who are financially dependent on you such as children and perhaps a spouse. The second is to pay inheritance tax so your heirs don’t have to sell a property or business to do so.
If you don’t have dependents or a federally taxable estate (currently over $12.06 million), you may not need life insurance. Keep in mind that insurance companies collect the premiums, invest the money, then pay their expenses and make a profit with the difference. This means that on average most people would be better off skipping insurance and investing the money on their own since insurance companies pay less than the total amount they collect plus returns on investment. . On the other hand, your family might be one of the few who really need the insurance. Like all forms of insurance, the key is to have as much as you need, but no more.
A final note on this is that even if you don’t currently need life insurance, you may still want to buy it now. Indeed, if your health deteriorates, it could be much more expensive, or you may not be able to buy it at all when you need it. So if you anticipate needing life insurance in the future, it might be a good idea to get it while you can.
2. You need life insurance to pay off your debts.
It’s a common myth. Many people worry that their heirs will inherit their credit card or other debts they may have accumulated. While debts can reduce the inheritance you leave to your heirs, excess debt dies with you unless the debt is joint, common, or has a co-signer/guarantor.
3. Everyone needs life insurance to pay for funeral costs and other final expenses.
Purchasing a life insurance policy for this purpose can be the most expensive way to fund it. If your heirs inherit savings or other liquid assets, they can still use them to pay these expenses. But if your debts are wiping out your estate, a small final expense policy might make sense to avoid leaving that burden on your heirs.
4. Everyone needs enough life insurance to fully replace their lifetime income.
Life insurance agents tend to like using this method of calculating life insurance needs because it’s fast and generates large insurance needs, but do you really need to replace the entire your income for the rest of your working life? Here are some questions to consider. For how many years will your dependents need financial support? If you just have a 15-year-old, it might be closer to the 7 years until he graduates from college than the 20 years you have until you retire.
Have you checked Social Security website to see what survivor benefits your family would be eligible for? These benefits are all too often overlooked and can be quite substantial, especially if you have kids under 18 (or up to 19 as long as they’re in high school full-time). Finally, remember that some expenses may increase, such as health care, if your spouse is dependent on benefits and childcare from your employer. You can use a calculator like this to estimate how much you need.
5. You don’t have to worry about your life insurance policy after buying it.
People tend to buy life insurance and then forget about it, but a change in your financial situation or a birth, death, marriage or divorce in your family could require you to update your beneficiaries or the amount. insurance you need. Since rates have been falling for years due to longer life expectancies, it may also be a good idea to see if you can purchase the same amount of insurance for less, especially if your medical condition or your lifestyle has improved. There are sites like term4sale that allow you to easily compare the prices of cheap term policies online. Just make sure you’ve secured a new contract before giving up on the old one.
It’s important to protect your family, but it’s equally important to make sure you’re not wasting insurance money that could be used for other financial needs. The key is to find the right balance for you. Don’t let these common myths put you off.