Life insurance is the backbone of a family’s financial plan, but misconceptions abound. A voluntary benefit specialist who is available at enrollments can educate your employees about this important financial tool.
Myth 1 – Singles with no dependents don’t need coverage.
This is false. The truth is, even single people need to have enough life insurance to pay off their personal debts along with medical and funeral expenses. If you are not insured, you might leave behind a trail of expenses for your executor or family. Having insurance is also a great way for low- or moderate-income individuals to leave a legacy to their preferred charity.
Myth 2 – Everyone needs two times their annual salary in coverage.
Although you hear this figure bantered about, it’s just a very rough guideline. The amount and type of life insurance coverage people need depends on their specific situation. Besides medical and funeral bills, you might have mortgage debts, college loans and other debts that need to be paid off. You might also have dependents who will need financial support for many years. A cash flow analysis can determine the actual amount of insurance an individual requires.
Term coverage can handle payment of a person’s final expenses and debts, but for some needs, permanent (“whole life”) insurance works better. Permanent life policies have a cash value that builds over time, giving you a pool of money you can borrow or withdraw, tax-free, later in life.
Myth 3 – Premium costs are deductible.
That isn’t true in most cases. The costs of life insurance are not deductible unless the policyholder is a business owner and the coverage is being used to protect the business owner’s assets. Only then are the premiums deductible in Section C of Form 1040.
Myth 4 – You should always purchase term insurance and invest the difference.
This isn’t necessarily true. In addition to permanent life’s savings component, it also has the advantage of level premiums for the life of the policy. The total premium for an expensive permanent insurance policy over a person’s lifetime might end up being less than the premiums for a less-costly term policy. Unlike term coverage, which gets more expensive as you age, a permanent life insurance policy’s premiums remain the same throughout your entire life, no matter how old or how sick you might get. Some term policies can become extremely expensive later in life, or if your health status changes. People who need coverage for many years should consider buying permanent life insurance.
They should also consider the risk of non-insurability. This can be catastrophic for beneficiaries who might have estate tax liability and who will require life insurance to pay those taxes. Permanent coverage can help you avoid the risk of becoming uninsurable later in life. Coverage becomes paid up after a specified number of premium payments, then remains in force until death.
Myth 5 – In the long run, variable universal life policies are better than straight universal life policies.
Universal life is a form of permanent insurance. The traditional whole life policy has set premiums and a cash value that grows at a specified rate. Universal life’s cash value grows at a variable rate, depending on how the insurer’s investments perform. Premiums have two components: one pays for the term life coverage provided by the policy, and the other pays for the savings portion of the policy. Policyholders can adjust their premiums, death benefit and savings element as their circumstances change.
Variable life insurance has the same features as universal life. But instead of having the insurer invest the savings component, variable life insurance lets policyholders choose how their savings are invested within a family of funds. Variable universal life policies also have additional fees related to the investment component of the policy. As a result, if the investment subaccounts in a policy fail to perform well, a variable policy may have a lower cash value than a straight universal life policy. Poor performance of the market can even result in considerable cash calls within variable policies, which can require more premiums to keep the policy in force.
Myth 6 – Only breadwinners need life insurance coverage.
This is not true at all. It can be extremely expensive to replace the services provided by a deceased homemaker — higher than most people think. Insuring a homemaker makes more sense than you might assume, particularly when it comes to daycare and cleaning costs.
Myth 7 – A return of premium (ROP) rider is a necessity on all term policies.
A return of premium rider does exactly what it sounds like—it returns some or all of the premiums you pay on a term insurance policy if you do not die during the policy term. Many different levels of return of premium (ROP) riders are available for the insurance policies that offer it. Most financial planners will tell you that it isn’t very cost effective. Whether individuals should buy this rider depends on their level of risk tolerance and their investment objectives.
We can help your employees understand the various life insurance options available and help them enroll in the one that’s best for their particular circumstances.