Life Insurance is one of the most important financial elements of your life. It’s a tool that mitigates your financial losses incurred out of sudden death of the breadwinner of the family. Although it’s something that everyone needs very few people consider it as an important financial planning due to awareness and misconception about the Life Insurance. Here are some of the most common Myths of Life Insurance:-
1. It’s better to invest somewhere than to buy any kind of Life Insurance policies
It’s one of the most common myths about life insurance. People think buying a life insurance policy is a total wastage of money. They prefer to invest their money somewhere rather. But they missed to understand that until they reach the breakeven point of asset accumulation, they need life coverage of some sort. If you fully depend on your investment made in your early life, you take a big risk especially when you have dependents. In case of your early demise, this investment may not be able to fulfil their future dreams. So, you must protect your loved-ones financial future insuring your life.
2. Life insurance provided by the employer is enough for your loved-ones financial future
If you have been covered with any life insurance policy provided by your employer, it’s good. But is it enough for your family dependent on your earnings?
Perhaps not! In general, employers provide life insurance coverage equal to 1 or 2 times of your annual salary which is not sufficient to replace your income. You need at least 5-8 times of your annual income. Some financial planners / experts even recommend 10-12 times of your annual salary. Also, your ‘Salary’ does not normally include commissions, bonuses, and second incomes.
Another reason you need to have life insurance cover on your own even if your employer has provided you life insurance cover of sufficient sum assured, you may lose it when you leave. You may be able to convert your optional insurance to an individual policy or purchase one on your own but either way, it may be much more expensive than purchasing a policy today, especially if your health deteriorates.
3. Only the breadwinner needs life insurance
It’s not always true. Even a member of your family that does not support financially has importance in your life somehow. Suppose, in any unfortunate event your spouse dies and you need to hire someone to replace her duties at home like – taking care of your kids/parents, cleaning of your house, cooking etc. that cost a lot of money. It would dent your savings big. Therefore, insurance even on the stay-at-home spouse also gives the working parent the opportunity to take time off work and help the family adjust to their loss.
4. Life insurance product is expensive
A study conducted by Life Happens and LIMRA, found that 25% of Americans said they need more life insurance but only 10% planned to purchase it within the next year. The main reason given was cost, with 63% saying that it’s too expensive. However, 80% of them overestimated the cost. 25% thought that a $250k 20-year level term policy for a healthy 30-yr old would cost $1k a year or more when it actually would cost about $150.
5. I cannot buy life insurance policies as I am not healthy
Even if you’re not healthy and have some medical conditions, you can buy life insurance. There are a lot of companies that cover a range of health conditions and some even specialize in high-risk cases. You can also purchase a policy that is not medically underwritten at all. Just be aware that they tend to be more expensive and have lower coverage limits.
6. Everyone should buy term insurance and invest the difference.
It’s not always correct. There are distinct differences between term and permanent life insurance, and the cost of term life coverage can become prohibitively high in later years. Therefore, those who know for certain that they must be covered at death should consider permanent coverage. The total premium outlay for a more expensive permanent policy may be less than the ongoing premiums that could last for years longer with a less expensive term policy
There is also the risk of non-insurability to consider, which could be disastrous for those who may have estate tax issues and need life insurance to pay them. But this risk can be avoided with permanent coverage, which becomes paid up after a certain amount of premium has been paid and then remains in force until death.
7. I am too young too young to worry about life insurance
Since age is the vital parameter to calculate premiums for life insurance policies, it’s always advisable to buy life insurance policies at your early age and also because you have fewer assets to pass on to heirs. The longer you wait, the more expensive it will tend to be and the more likely you are to develop a medical condition that makes it much more expensive. Of course, the biggest problem with procrastinating life insurance is that by the time you need it, it’s too late to get it.
Read our article “Know about the maturity benefits of your term insurance” for understanding more about Life Insurance.
However life insurance needs and quantum of coverage is very personal. It depends on individual’s situation. Few don’t even require insurance at all. It must be well-informed buying. You may seek financial planner advice in order to buy life insurance policies and the quantum of coverage.