Life insurance is a mystery to most people, but it’s an important part of your financial picture, so don’t let these common misbeliefs stop you from protecting yourself.
Eight of 10 Americans believe their family is their most valuable asset, but only 41% are protecting their family against the unexpected with an individual life insurance policy, according to a recent survey by Edward Jones and nonprofit consumer-education organization Life Happens. What’s more, one-quarter of respondents reported that their biggest worry is leaving loved ones with unexpected financial burdens if they were unable to work or die prematurely.
Clearly, too few Americans are taking the necessary steps to help protect their hard-earned savings, their families and their futures even though there is a relatively simple solution. One of the best ways (and often most cost-effective way) to help ensure your financial goals are protected from an unexpected death — as well as provide more financial security for your family — is through individual life insurance. Yet, 32% of respondents reported that life insurance is a low priority — or not a priority at all — when starting a family, according to the recent Protecting What Matters Most study.
Why such a disconnect?
Well, for one thing, people don’t want to think about their mortality. But there are many other reasons as well, many born of misconceptions about the benefits that life insurance can provide and how much it costs.
For example, when presented with a list of expenses that life insurance can cover — including funeral costs, retirement income, estate considerations, estate taxes, charitable donations and education — nearly one-quarter of respondents were unable to identify any of these options. Further, among those who were able to identify potential uses of life insurance benefits, funeral costs (67%), retirement income (28%) and estate considerations (26%) were the most well-known.
At the end of the day, a financial strategy is not complete until there is a plan to protect against the unexpected, and unfortunately many seem to be missing the role that life insurance can play in protecting that strategy. In short, the survey suggests that many Americans are walking a financial tightrope without a safety net. This can change, however, with greater education to demystify many common issues surrounding life insurance. Let’s take a look at some of the myths that have people stymied.
Myth No. 1: I have enough life insurance through work.
This may be a good start as long as you are employed, but group life insurance through work may not be adequate to cover long-term needs and it’s generally not portable. Typically, life insurance through work only provides benefits equal to one or two times your annual salary. Growing families usually need greater protection than what group insurance provides, and they need coverage that is not contingent on work status.
For example, we recommend using the acronym LIFE to determine how much life insurance is appropriate:
- “L” stands for liabilities, such as mortgage and loans.
- “I” stands for income needs for your family to replace ongoing living expenses.
- “F” stands for final expenses.
- “E” would be education expenses for your children.
Adding these together, it is highly unlikely that two times your annual salary would be enough life insurance to cover the above.
Myth No. 2: My emergency fund can handle the unexpected.
An emergency fund is a key part of your financial strategy, and we recommend an emergency fund that can cover about three to six months of living expenses. But an emergency fund is designed to provide for a short-term emergency, like a medical expense, temporary unemployment or perhaps a home or auto repair. It certainly is not designed to cover a catastrophic loss and the loss of future income that life insurance is designed to cover.
Myth No. 3: There are too many options, it’s impossible to know which one to choose.
If this sounds like you, you’re not alone: More than half of Millennials haven’t gotten coverage because they don’t know which type or how much insurance to buy, according to the 2018 Insurance Barometer Study. Yes, there are a variety of options, but that should be viewed as a way to tailor coverage to meet your individual needs — not as a deterrent to working toward securing your financial future. In general, there are two major categories of life insurance — term and permanent.
So which one makes sense? It all depends on your needs, and you can think of the difference as renting (term) vs. buying (permanent).
- Term: If your primary goal is to provide for your family in case of an unexpected death, and you want to cover this risk for a fixed number of years (such as until your children are grown), then term insurance is likely the most appropriate option. Term insurance is also generally the most affordable. However, if you want to continue the insurance after the initial term ends, the cost of insurance could rise. In addition, there is no underlying cash value that is built up by the premiums you pay, so there is a tradeoff between the lower premiums and the lack of cash value.
- Permanent: On the other hand, if your goal is to provide for a lifetime need, or you may have other potential goals, such as wealth transfer or potentially covering a long-term care need, permanent insurance may be more appropriate. Permanent insurance can provide lifetime coverage and can also build up a cash value, which could be valuable if your needs change. However, it is also generally more expensive given these additional potential benefits (as outlined below).
Myth No. 4: Life insurance is too expensive.
Actually, it costs far less than most people think. In fact, most people overestimate its true cost by three times, with four in 10 Millennials thinking it cost five times what it actually does, according to the 2018 Insurance Barometer study. Based upon our estimates, term policies covering about seven to 10 times your income for 20 years could cost about 1%-2% of your annual salary. Similar coverage for permanent insurance could cost about four to six times the cost of term, but as noted earlier, there are benefits and tradeoffs for each. Importantly, your premium will vary based upon factors such as your age, gender, term and health status.
Myth No. 5: I don’t know where to turn for help.
Anyone who is working with a financial adviser can make the right choices with a little help. In fact, your financial adviser is the best person to turn to for advice on insurance, in our opinion, since the primary purpose of life insurance can be to protect your most important goals should the unexpected occur. He or she knows your family, your financial goals and your aspirations for the future and can help you choose insurance that best fits with your overall financial goals and budget.
Making any kind of financial decision, including buying life insurance, can seem daunting at first. But a little education and a detailed discussion with your financial adviser can go a long way toward demystifying life insurance. With a little time and effort, you will soon be on the road toward protecting your most valuable assets and helping to ensure financial security not only for yourself, but for the next generation as well.