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Debunking Common Life Insurance Myths

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Many Americans do not purchase life insurance due to misconceptions about the product; they think it is too expensive, it is not right for their needs, or they do not understand the available options.

Approximately 4 in 10 households without any life insurance would have immediate trouble paying living expenses if they were to lose their primary wage earner - up from 3 in 10 households last year - according to the 2017 Insurance Barometer Study by Life Happens and LIMRA.

More than half of the respondents to would feel the financial impact from the loss of their primary wage earner in just six months, and more than a third would feel the impact in a month or less.

In honor of Life Insurance Awareness Month, here are the facts behind the most common life insurance myths.

Recap: What is the difference between term and whole life insurance?

It is important to note there are two common types of life insurance: term and whole.

As the name suggests, term life insurance provides a specific death benefit and protects you for a specific period of time. Coverage is available in a variety of different contract periods, such as 5-year, 10-year, 20-year and 30-year increments.

If you are alive at the end of the contract period, you or your heirs do not collect any benefits. If you choose to purchase additional coverage, insurers will calculate new premium that reflects the greater likelihood of mortality that comes with your increased age.

Term life insurance is suitable for those seeking maximum coverage at the lowest possible cost for a specific period of time. If you have a financial obligation with a specific end date, such as a home mortgage, term life insurance might be right for you. In addition, cash-strapped parents who are trying to cover current living expenses while also saving for college tuition may purchase term life insurance to cover until their child's education is complete.

Whole life insurance, also known as permanent life insurance, provides lifelong protection. The full benefit amount will be paid to your heirs as long as you pay your premiums fully and on time, and as long as you do not take any loans, withdrawals or surrenders.

This type of life insurance is favorable for high-income policyholders who have trouble saving money, as the higher premiums include a forced savings element: the cash value of the policy, which increases each year.

Whole life insurance is also ideal for policyholders with current health issues, or those who worry about health declines that may render them uninsurable later in life.

Myth #1: You cannot have more than one life insurance policy.

There are certain types of insurance that do not allow you to hold multiple policies. However, this rule does not apply to life insurance. In fact, many financial advisors recommend owning multiple life insurance policies if your personal circumstances warrant them.

Many people purchase a policy and add another one later in life to complement existing coverage. For example, you may purchase a permanent life insurance policy to cover your basic life insurance needs, and add a term life insurance policy while you're children are young and completely financially dependent on you. Once your children have grown up, this additional financial dependency would typically disappear, and you could let your term policy expire.

However, you are required to disclose all existing life insurance policies when applying for additional coverage. This is because the insurance carrier will want to compare your existing and requested coverage to your assets, income and other financial responsibilities in order to prevent overinsurance.

Myth #2: Stay-at-home parents do not need life insurance.

While it seems obvious that the breadwinner in the household should have life insurance, many people do not consider coverage for a stay-at-home parent.

However, the duties and responsibilities of a stay-at-home parent are valuable services that would be expensive to cover if the unthinkable happened.

Salary.com estimates that the combined work of a stay-at-home parent would amount to a salary $112,962 per year.

Parents spend years driving the kids to soccer practice, cooking, cleaning and caring for their children. Imagine if a parent was not there to fulfill these duties; the sudden need for cooking/cleaning services, paid childcare or even the monetary loss from the breadwinner missing work could become financially devastating very quickly.

Life insurance coverage for the stay-at-home parent can provide families with peace of mind and protection against the unforeseen costs of single parenting.

When purchasing life insurance for a stay-at-home parent, carefully consider the responsibilities that need to be covered when determining the right amount of coverage.

Price out any services the other parent would need to purchase to cover those duties, figure out an average "salary" and use this figure to decide how much insurance to purchase.

Other factors that may influence the amount of insurance you would need include:

  • Whether the parent's current job will still be manageable without another parent to lighten the load
  • If the job allows that parent to take time off to be with their children after the death or when they get sick
  • If a parent travels often for work, are paid per project, or work odd hours, whether he/she can keep up the same workload without a parent at home with the kids

Myth #3: Life Insurance is too expensive.

Many consumers tend to overestimate the price of life insurance, according to the 2017 Life Happens and LIMRA study.

When surveyed about the annual price for a 20-year, $250,000 term life insurance policy for a healthy 30-year-old, the median estimate was $400. However, the actual cost was just $160.

Factors that affect the cost of life insurance include:

  • Your age: Life insurance costs generally increase as you age.
  • Your health profile: Any existing chronic health conditions, or being a smoker, will increase your rates.
  • Your gender: Statistically, women live longer, so they will typically have lower life insurance costs.
  • Your occupation: The material duties of your occupation and their associated risks can affect your rates as well. For example, a sky diving instructor is much riskier to insure than a receptionist is.

Have questions about life insurance?

If you have questions about whether life insurance makes sense for you, explore our Life Insurance Archive to learn more about costs, policy features, the claims process and more.

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