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4 Myths You Believe About Life Insurance

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More than half of Americans don't plan on buying life insurance in the next year. Why? There are numerous misconceptions about the product and its purchase process that prevent people from even trying. In honor of Life Insurance Awareness Month, here are four common myths that keep you from buying life insurance.

Myth #1: It's expensive.

This is one of the biggest misconceptions about life insurance. According to the 2015 Insurance Barometer Study, more than 80% of those surveyed overestimated the price of a 20-year, $250,000 term life insurance policy for a healthy 30-year-old. The actual cost was $160, but respondents gave a median estimate of $400.

Millennials and Gen Xers were the most likely to overestimate the cost; millennials missed the mark by 213% on average and Gen Xers by 119%.

While the cost of life insurance varies on a variety of factors, including age, gender, occupation and health, it's important to know it's more within your reach than you expect.

Myth #2: If you're young, healthy and/or single, you don't need it.

Life insurance premiums are essentially risk calculations based on mortality. That's why, if possible, it's best to buy a life insurance policy when you're young and healthy.

According to NerdWallet, a policy that costs $12 a month at age 30 will cost $32 a month at age 50. That's a difference of $20 per month, which amounts to savings of $240 per year.

If you're single, you probably don't think life insurance is valuable to you. But here's why single people should consider it:

Even if you're single, your death would likely have a financial impact on others. Who becomes responsible for your remaining debts, mortgage, car payments, and funeral expenses? What if you have student loan debt from private lendors? Life insurance can cover these remaining expenses so your finances don't become someone else's burden when you die.

You have people who depend on your care and support. If you're a single parent, life insurance can be a great way to leave tax-free legacy to your children. This can help them with the ever-rising costs of college education.

Many young adults help aging, disabled or special-needs friends and family members and can use life insurance as a way to fund the services you provide if you're no longer around to help.

It doesn't always have to be about the death benefit. There are many other uses for life insurance, which (depending on the policy) may include:

  • To borrow against it
  • To use in retirement as a source of cash flow
  • To pay estate taxes
  • To pay mortgages and debts

If you always have a reason to dip into your savings, a life insurance policy may be a ideal savings component. You can also add riders to address needs such as long-term care and long-term disability.

Myth #3: Employer-provided life insurance is the only coverage you need.

Group life insurance is a great employer benefit, but it probably won't fully satisfy your needs. An employer-paid policy generally offers a coverage amount equal to one or two times your annual salary; many people need at least five to eight times their current wages to cover expenses.

There's also the possibility that your policy isn't transferrable; if you leave your job, your coverage will not follow.

So what can you do? You can purchase additional coverage through your emplooyer, buy supplemental life insurance, or both! Before doing so, figure out how much insurance you'll really need.

Coverage calculators from NerdWallet or Life Happens can help you determine your desired level of coverage based on your wages, savings, expenses, debts, etc. These calculators should help determine whether you're better off puchasing additional coverage through your employer or opting for a supplemental policy.

Myth #4: Stay-at-home parents don't need life insurance.

The duties and responsibilities of a stay-at-home parent are valuable services that would be costly to replace if the unthinkable happens. When purchasing life insurance for a stay-at-home parent, consider the following:

  • Think about all of the responsibilities they take on and how those responsibilities would be distributed if something devastating happened.
  • Price out any services parents would need to purchase to cover those duties. From there, figure out an average "salary" and use this amount to decide how much life insurance coverage is needed.
  • Will a parent's current job still be manageable without another parent to lighten the load?
  • Does your job allow that parent to take time off to be with your young children after the death or when they get sick?

For more information

The Dangers of Letting Your Life Insurance Lapse

How To Lower Your Life Insurance Costs

What is Whole Life Insurance?

What is Term Life Insurance?

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