Do you have enough life insurance to provide for your family if something happens to you? This is a question I got recently and unfortunately many people have no idea. After all, death and pushy life insurance agents are two things most people would probably prefer not to deal with.
Still, it’s an important question. If you don’t have enough life insurance, you can leave your family in a difficult financial situation. On the other hand, you can waste thousands of dollars on something you don’t really need if you buy too much. When determining how much life insurance to buy, here are some common myths to avoid:
1) Everyone should have life insurance.
Life insurance has two main functions. The most common is to provide for people who are financially dependent on you like children and maybe a spouse. The second is to pay estate taxes so your heirs don’t have to sell property or business to do so.
If you have no dependents or a federally taxable estate (currently over $12.06 million), you may not need life insurance. Keep in mind that insurance companies collect premiums, invest the money and then pay their expenses and profit on the difference. This means that, on average, most people would be better off skipping the insurance and investing the money themselves, since insurance companies pay out less than the total amount they collect plus the return on investment. On the other hand, your family may be one of the few who really need the insurance. Like all forms of insurance, the key is to have as much as you need, but no more.
One final note on this is that even if you don’t need life insurance right now, you may still want to buy it now. This is because if your health deteriorates, it may be much more expensive or you may no longer be able to buy it when you need it. So if you expect to need life insurance in the future, it might be a good idea to get it while you can.
2) You need life insurance to pay off your debts.
This is a common myth. Many people worry about whether their heirs will inherit their credit card or other debt they may have accumulated. Although debts can reduce the inheritance you leave to your heirs, the excess debt dies with you unless the debt is joint, community property, or had a co-signer/guarantor.
3) Everyone needs life insurance to pay for funeral and other final expenses.
Buying a life insurance policy for this purpose can be the most expensive way to finance it. If your heirs will inherit savings or other liquid assets, they can always use them to pay for these expenses. But if your debts wipe out your estate, a small final expense policy can make sense to avoid leaving your heirs with that burden.
4) Everyone needs enough life insurance to fully replace your lifetime income.
Life insurance agents generally like to use this method of calculating life insurance needs because it is quick and generates large amounts of insurance needs, but do you really need to replace your entire income for the rest of your working life? Here are some questions to consider. How many years will your dependents need financial support? If you only have a 15-year-old, that may be closer to the 7 years until college graduation than the 20 years you have until retirement.
Have you checked the Social Security website to see what survivor benefits your family will qualify for? These benefits are too often overlooked and can be quite significant, especially if you have children under the age of 18 (or up to 19, as long as they are regular high school students). Finally, remember that some expenses may increase, such as health care, if your spouse relies on your employer’s benefits and child care. You can use a calculator like this one to estimate how much you need.
5) You don’t have to worry about your life insurance policy once you buy it.
People tend to buy life insurance and then forget about it, but a change in your financial situation or a birth, death, marriage or divorce in your family may require you to update your beneficiaries or the amount of insurance you need. As rates have been declining for years due to longer life expectancies, it may be a good idea to see if you can purchase the same amount of insurance at a lower price, especially if your health or lifestyle has improved. There are sites like term4sale that allow you to easily compare cheap term policy rates online. Just make sure you secure a new contract before ditching the old one.
Protecting your family is important, but so is making sure you’re not wasting money on insurance that could be used for other financial needs. The key is finding the right balance for you. Don’t let these common myths put you off.