Life insurance is one of the most common types of insurance that people buy. According to the Insurance Information Institute, 62% of Americans had at least some life insurance coverage in 2013. (That’s a big drop from the 78% of Americans who had life insurance in 2004!) Yet life insurance is also one of the most misunderstood types of insurance. Many of us are confused about the basic facts of life insurance, like who needs it, how much coverage to buy, and what purpose it serves. Below, we debunk five of the most common myths about life insurance coverage.
Myth #1: The life insurance I get through my job is enough.
Fact: If you get life insurance as part of your benefits package from your employer, it’s definitely a nice perk, but it may not meet all of your needs. First, the insurance is not permanent. If you leave your employer, your coverage probably won’t follow you.
Second, the coverage you get may not be enough to meet all of your family’s needs if you were to pass away. For example, some employer-provided life insurance policies provide death benefits equal to about one year’s worth of your salary. But if you are your family’s main breadwinner or a co-breadwinner, a single year’s worth of salary won’t keep them afloat for long. You’ll want coverage that pays benefits between five and ten times your annual salary. If you have a spouse who does not work, a large mortgage, or special-needs children, having enough life insurance coverage is even more critical.
Myth #2: I’m single, so I don’t need life insurance.
Fact: It’s true that unmarried and childless individuals often have less need for life insurance than people who are married or have kids. But even single individuals might benefit from life insurance in certain situations. If anyone in your family would be negatively affected financially by your death, you may want to consider buying a policy.
For example, if your parents co-signed your student loans or mortgage, a life insurance death benefit can help them pay off that debt if you die unexpectedly instead of leaving them on the hook. Life insurance can also help cover end-of-life expenses like a funeral, which according to the National Funeral Directors Association cost an average of $7,045 in 2012. Another reason to buy coverage now is that your life circumstances will likely change in the future, and it may be easier – and cheaper – to get coverage now when you’re young and healthy. Finally, life insurance is a way for you to leave a legacy to beloved family members or your favorite charities, even if you haven’t had an opportunity to accumulate significant assets.
Myth #3: I don’t work, so life insurance isn’t necessary.
Fact: If you are a stay-at-home mom, care for an elderly parent or other family member, or don’t work outside the home for another reason, life insurance may seem like an unnecessary expense. But even if you aren’t financially compensated for it, the work you do still has value to your family – value that could be costly to replace if you passed away.
Consider this: If you care for children and manage the household, your spouse would have to find someone else to take over those duties or cut back on their own work hours to take over the tasks themselves. (This delightful infographic from Salary.com calculates that in 2014 a stay-at-home mom’s unpaid work was worth an annual income of $118,905!) A life insurance benefit can help cover those expenses and make it easier for your family to cope after you’re gone.
Myth #4: All life insurance is the same, so I should just get the cheapest policy.
Fact: There are many different varieties of life insurance, and the best one for you depends on your specific needs. While it’s easy to simply shop for insurance coverage based on price alone, you need to look carefully at each policy to be sure that you understand what you are – and aren’t – getting. First, you need to decide between term insurance, which offers only death benefits and is valid for a fixed length of time (say 20 years); and permanent or whole insurance, which offers a death benefit but also accrues a cash value.
There’s also variable life insurance, which combines insurance coverage with an investment component; and universal life, which is similar to whole life but offers more flexibility in how you pay premiums. You need to then consider your specific coverage needs (based on your income, debt, family’s lifestyle, and other factors), how much of a premium you can afford, how long you need coverage to last (if you’re buying a term policy), the policy’s riders (or limitations), and how insurance fits into your overall long-term financial plan.
Myth #5: Once I buy a life insurance policy, I’m all set.
Fact: Life insurance is not a set-it-and-forget-it product. Your life insurance needs will change over time – as you marry, have children, advance in your career, and eventually retire. To make sure that your coverage is meeting your needs every step of the way, you should include a review of your life insurance coverage as part of your annual financial to-do list.
Also, don’t forget to read more great insurance articles in our Savvy Woman article archive.