There are a lot of myths and misconceptions when it comes to life insurance.
You need to know the truth when it comes to what you are purchasing, donít just assume based on rumors youíve heard. Mistakes made when buying life insurance have long-lasting consequences. If your family isnít provided for as they need to be, you wonít be here to fix it.
You need to choose the life insurance that is right for you. You can do so by avoiding these seven common myths:
Myth #1: You should buy seven times your annual earnings.
The rule of thumb that says you should have so many times your annual income isnít necessarily true. The average American has a policy three times his or her annual income. Your dependents should be able to withdraw 5% each year from your insurance policy money without having to touch the principal. If you are making $60,000 annually and you purchase three times your annual income, you have an $180,000 policy. This means your heirs will only be able to withdraw $9,000 each year.
Most people have less coverage than they need. To calculate the amount you actually need, estimate how much your heirs will need to maintain their lifestyle without you. Include the costs of child care, education and emergencies. Add up all other sources of income and subtract it from the expenses. This will show how much of a policy you need to have.
Myth #2: Agents donít give you the best deals, the internet does.
The internet is a great place to shop and research life insurance. But donít assume that youíve gotten the lowest price just because itís the internet. Good agents will find a competitive rate thatís comparable to your online quotes.
Often, the premiums posted on internet sites are misleading. They are usually quoting you are rate that only those in the healthiest of conditions receive. They may give you an initial rate that will increase significantly in a year.
You canít just compare rates. You need to also compare the policy that you are receiving. Shop around on the internet and with various agents for the best policy for you.
Myth #3: All policies are the same, you are just charged more
You have to read your policy. It is a contract between you and an insurance company. It tells you what is payable and what isnít. All policies have different features. Make sure that you have received what you were told you were getting. Make sure that all names are correctly spelled and all numbers are right. Your written policy is what matters, not your phone conversations or your agentís promises.
Myth #4: You should always name your estate beneficiary
If you do, the proceeds will go through probate. This means that your policy proceeds could be tied up for several months to over a year. Your heirs will not have access to the money during this time.
The proceeds will also increase the value of your estate, which means your family might have to pay estate taxes. If you have an estate over $1.5, you will pay taxes depending on your state. Estate taxes are often as high as 48%, so do everything you can to avoid them.
Myth #5: If you are in poor health, you are uninsurable
This simply isnít true. There are a lot of companies out there that specialize in coverage to those who have or have recovered from a serious illness. The coverage is often expensive, but you can get it.
Being turned down once doesnít mean it will happen again. Shop around, one company might charge you an added surcharge, while another will charge you a standard to preferred rate. It really depends on the company, not just your health status.
Myth #6: Insurance agents know what you need
Many life insurance agents are looking out for your best interests, others arenít. Thatís the way it is. Agents are compensated differently for selling different products; that often influences what they sell you.
If you need help, also ask your CPA what type and how much life insurance you should buy.
Myth #7: Life insurance is more important than disability coverage
Most people recognize life insurance as an important part of their financial planning. They often overlook the importance of disability insurance. You are 50% more likely to be disabled than you are to die when you are under the age of 50.
Most people will find that term life insurance best fits there needs and offers less expensive premiums. If you do, you also need to have disability insurance.