Life Insurance Basics: The 6 Things You Need to Know
September 1, 2016 | Your Finances
Life insurance is only for the death benefit, right? Actually, that’s not true.
If you have it through work, you have enough. Are you sure?
You may think there’s no reason to buy it before getting married or having kids. Not necessarily.
There are a lot of misconceptions about life insurance. And it’s easy to put off buying it because of those misconceptions. However, it’s a good idea to consider buying life insurance sooner rather than later.
It is a critical piece of your financial plan. “Life insurance is an essential product that not only protects your family’s financial plan when you die, but can also provide financial benefits while you’re alive,” says David Simbro, senior vice president of Life and Annuity Products at Northwestern Mutual.
Here are six common life insurance myths debunked.
Myth 1: The only way anyone would use it is if I died. That is one obvious use, but there are additional uses depending on the type of life insurance you buy that make it an integral piece of your financial plan. To understand, it’s important to first define the two types of life insurance: term and permanent.
Term insurance provides a death benefit for a certain number of years or until a certain age. When the term period is up, you no longer have a death benefit. Often people will start by buying a small permanent policy and purchase term insurance (because it’s typically less expensive) to meet their full need, later converting their term insurance to permanent insurance.
Permanent insurance provides a death benefit that lasts for your entire life, meaning no matter when you die—even if you’re 102—your family will get the death benefit. But you can also get benefits from permanent insurance while you are alive. That’s because as you pay for your policy, over time it builds cash value (think of a bucket of money that keeps filling up throughout your life) that you can access at any time for any reason you choose. And the cash value can grow tax free; with most policies it never goes down.
“The flexibility of permanent life insurance is key. That makes it an ideal asset to be part of your portfolio,” says Simbro. You benefit by protecting your income and assets through the death benefit, maximizing options for meeting lifetime savings goals or unexpected needs and building and preserving your wealth.
Myth 2: There’s no reason to buy it unless I have kids or a spouse. Typically these are the people you would want to protect financially with life insurance. So why would you ever buy it if you aren’t married or don’t have kids?
“The price of a life insurance policy is based on the age and health of the person who is being insured, so typically it is less expensive to purchase a policy when you are younger and healthier,” says Simbro. Many policies allow you to add a benefit allowing you to purchase additional coverage in the future and lock in your health status when you buy them. That lets you buy a little now and then buy more later based on your health today. “If having a family is something that may appeal to you later, you may want to consider buying at least some insurance now,” adds Simbro.
Myth 3: I have life insurance through my employer; I have enough. “If you get coverage through your employer, remember that it goes away if you change jobs or retire,” says Simbro. “It’s not portable. That puts you in a tough spot if you’re depending on that coverage for the rest of your life. It’s likely going to expire before you do.”
Additionally, employers typically provide you a benefit that is a multiple of your income, for example, two or three times your annual salary. Many times, that amount is far too low, so it’s important to determine how much your family will really need if you die.
Myth 4: I don’t earn an income, so there’s no reason for me to have life insurance. Just because you don’t have an income does not mean you don’t need life insurance. Just as life insurance is meant to replace the income a working spouse provides, it can also help pay expenses that would be incurred if a stay-at-home spouse were to die. That could include the cost for things like child care, housekeeping or other work around the home. Additionally, with permanent insurance, the policy will accumulate cash value that you could use at some point in the future.
Myth 5: I can always buy it later. Maybe, but maybe not. Remember, it is cheaper to purchase a life insurance policy when you are younger and healthier. If you wait to buy until you are older, you also risk the possibility that you may develop a health issue that would dramatically increase the cost of your policy or make you uninsurable. That could include things like diabetes, cancer, etc. Buying a policy when you are young and healthy protects you from the uncertainty of what’s to come.
Myth 6: Once the kids are out of the house and I approach retirement, there’s no reason to keep it. The reason you need life insurance may change, but no matter what stage of life you’re in, there’s likely at least one reason it can be useful. In retirement, those reasons can include things like supplementing your retirement income and paying premiums for other insurance you may need, in a tax-efficient way. Finally, if you’re considering leaving a legacy after you’re gone, the death benefit of permanent life insurance goes farther than some other gifts because it is typically paid tax free.
Buying life insurance may be more affordable than you think, especially if you start when you’re young by purchasing a small amount of permanent insurance and buying a term policy to help cover your full insurance need. The death benefit will protect your financial plan for your family should something happen to you. And with the permanent life insurance, the cash value in the policy becomes a stable source of funds that you can access at any time for financial needs. A financial professional can help you calculate how much life insurance you need and discuss how it fits into your broader financial plan.