7 Life Insurance Myths: Get The Facts

October 18th, 2011 | Author: Mitch Reynolds

7 Myths About Life Insurance That People Commonly Believe

Get the facts about these common misconceptions about life insurance

Life insurance myths set straight Very often in my career I have had to answer these common questions about life insurance. It seems like people have this preconceived idea of how life insurance works, or what they should buy. I would like to set the record straight for these top 7 questions I commonly hear from clients.

I believe the misinformation below is due to people seeking advice on the complicated topic of life and health insurance from friends and family. Unless you are a licensed and qualified insurance broker, it would be hard to answer these questions without making some mistake of fact. Please, when getting information about life insurance products and services, speak to a licensed professional for answers, not your best friend’s uncle.

1. Life insurance is expensive

Actually it doesn’t have to be. In fact life insurance, namely term life insurance, has never been cheaper in Canada than it is today. If you are healthy and can qualify for preferred rates (discounts awarded to people in exceptionally good health) you can lock-in even lower premiums for 10, 20 or even 30 years of coverage.

Other types of coverage, namely whole life insurance and universal life insurance, can be more expensive vs. term life. This is because you are not renting coverage for a certain number of years; you are actually buying the coverage and owning it. The difference is like renting an apartment or buying a house. The house costs more but has a lot more value to the owner(s). If you look closely, the rate of return on permanent life insurance can be one of the best, guaranteed, long-term growth products in Canada today.

2. My life insurance through work is enough

Employer sponsored group life insurance is nice to have, but it is not your policy. As an employee you can be included in the group and get what coverage amount the company is offering. Group insurance is relatively inexpensive but the costs for coverage increase quickly as you age. Also, if you ever leave that job or retire, your entire group insurance plan, including the life insurance, ends immediately upon your date of termination.

If is never recommended that people rely 100% on their group life insurance. The employer never intended their group benefits plan be the sole source of insurance planning for employees. It is not only wise, but a fundamental piece of your financial plan to own and control a large segment of your total life insurance need, in conjunction with your group life insurance plan.

3. You can only have one life insurance policy

I’m not sure where this idea came from. Maybe people think that only one life insurance company will pay out, or that if you own two life insurance policies that only the larger one will pay but not the smaller policy. This isn’t true! When applying for new life insurance you must list the other policies you currently own. Telling the new life insurance company what policies you have and how much you are currently insured for is part of the underwriting process. The new insurance company wants to make sure that you can afford the new premium and that you are not “over insured”. It is reasonable in the eyes of a life insurance company that a person can insure themselves for about 20 times their gross income. Anything above that would raise some concern. Why do you need so much coverage, and how are you going to afford the premiums? Does the application make sense?

4. You must buy either term or permanent life insurance, not both

Of course you can own both term and permanent life insurance. Policies have even been designed so that a term rider can be included inside a permanent life insurance policy. It is standard to design life insurance with a combination of both term (temporary) coverage and permanent lifetime protection. I often here this concern when doing a financial needs analysis for clients and coming out with a large amount of life insurance risk, like $1 million. If the clients are interested in permanent coverage they are afraid they could never afford to buy the whole $1 million of universal life or whole life insurance. This is a probably true, as it is very expensive to buy a large face amount of permanent life insurance. What a person can do is buy a smaller amount of coverage as permanent life insurance protection and top up the rest of their needs with term life insurance for the time they need it (like 20 years to raise children and pay down a mortgage).

5. Life insurance is only for families

While life insurance is very commonly used by families to protect loved ones, it is also beneficial for single people and business owners. A single person probably has some debts to pay off, and a small life insurance policy will make it easier for his/her estate to clean off debts and settle affairs if anything were to happen. Also, a life insurance policy purchased while you are young and single will lock in your insurability. This means once the life insurance company has offered you coverage they can never take it away. As young, single people age, they too often become husbands, wives, and parents and they now need the life insurance. What if they had become unhealthy in the mean time and could no longer qualify for life insurance. That would be bad news for the family. But if they had a life insurance policy in their “back pocket” they could just change the beneficiaries to their new family and coverage continues.

A business owner too needs life insurance to protect his business in the event he/she is gone. There might be partners or investors who require protection. There also might be debts owing the bank or a family that requires this business to continue to have an income, etc. For many reasons the business could benefit from owning a life insurance policy on the business owner, regardless of whether or not they are part of a family.

6. Retired people don’t need life insurance

Well, if all retirees were independently wealthy, maybe. If every Canadian had enough money in savings to live off for the rest of their life, having paid off all debts, and spending Canadian winters as snowbirds in Arizona, then yes, you probably don’t have a great need for life insurance. Unfortunately this is the minority of Canadian retirees. Most Canadians are finding it hard to retire without some additional income. They are still carrying debt which needs to be paid off, and many rely on government assistance programs. Even for those that have built up wealth, there is the final tax bill for the estate, which can be a huge cheque to be paid to the Canada Revenue Agency after your death.

If people were smart and had purchased permanent life insurance when they were younger they would have a policy moving forward with them into old age. If not, they will still have a sizable final expense bill that will need to be paid. Life insurance for retirees can be a final expense plan taking care of the funeral and legal fees, or it can protect a larger estate from the erosion of taxation. Whatever your situation in retirement years, life insurance is still a good financial planning tool.

7. All life insurance companies are the same

It would be like going into to an ice cream shop and all the choices are plain old vanilla. Life insurance companies are as different as the many flavours of ice cream. We know it is all ice cream, that hasn’t changed, but the various flavours appeal to many different tastes. The same is true of life insurance companies. Let me give you an example. If you are a cigar smoker there is one life insurance company that will give you standard “non-smoker” rates if you smoke only one cigar per week on average. Another company will issue $250,000 of coverage of less with only a verbal medical questionnaire (no nurse will visit). Some companies are more lenient on foreign travel than others, so if you go overseas to non-vacation destinations, like Mumbai, India, then we should look at company X vs. company Y. Working with a life insurance broker who knows the ins and outs of the different life insurance companies is very important if your needs vary at all from a plain old vanilla flavour.

Get personalize advice from a broker at Life Guard Insurance

At Life Guard Insurance we have a team of qualified life insurance brokers across Canada who can help you with your life insurance needs. Please feel free to contact us to find a local broker near you who can show you how life insurance would benefit your financial plan.

The article was written by +Mitch Reynolds. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about life insurance myths would be very much appreciated.