Erik Carter, Contributor
Aug. 29, 2022
Do you have enough life insurance to provide for your family if something were to happen to you? This is a question I recently received and unfortunately, many people have no idea. After all, death and pushy life insurance agents are two things most people would probably rather not deal with.
It's an important question though. If you don't have enough life insurance, you could leave your family in a difficult financial predicament. On the other hand, you could end up wasting 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 steer clear of:
1) Everyone needs to 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 perhaps a spouse. The second is to pay estate taxes so that your heirs won't have to sell property or a business to do so.
If you don't have 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 make a profit with the difference. This means that on average, most people would be better off skipping the insurance and investing the money on their own since the insurance companies pay out less than the total amount that they collect plus the investment returns. On the other hand, your family could be one of the few that really needs 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 currently need life insurance, you may still want to purchase it now. That's because if your health deteriorates, it could be a lot more expensive, or you may no longer be able to purchase it at all when you need it. So, if you anticipate needing 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 are concerned about their heirs inheriting their credit card or other debt they may have accumulated. While debts can reduce the inheritance that you leave your heirs, excess debt dies with you unless the debt was joint, community property or had a co-signer/guarantor.
3) Everyone needs life insurance to pay for funeral and other final expenses.
Purchasing a life insurance policy for this purpose can be the most expensive way to fund it. If your heirs will be inheriting any savings or other liquid assets, they can always use them to pay these costs. But if your debts wipe out your estate, a small final expense policy may make sense to avoid leaving your heirs with this burden.
4) Everyone needs enough life insurance to fully replace your lifetime income.
Life insurance agents tend to love using this method of calculating life insurance needs because it's 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 just have a 15-yr old child, that might be closer to the 7 years until they graduate from college than the 20 years you have until you retire.
Have you checked Social Security's web site to see what survivor benefits your family would be eligible for? These benefits are too often overlooked and can be quite substantial, particularly if you have children under age 18 (or up to 19 as long as they're a full-time high school student). Finally, don't forget that some expenses may go up like health care if your spouse relies on your employer's benefits and childcare. You can use a calculator like this to estimate how much you need.
5) You don't need to worry about your life insurance policy after you purchase 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 could require you to update your beneficiaries or the amount of insurance you need. Since rates have been coming down for years due to longer life expectancies, it may also be a good idea to see if you can purchase the same amount of insurance for a lower cost, especially if your health status or lifestyle has improved. There are sites like term4sale that allow you to easily compare the rates of low-cost term policies online. Just be sure that you've secured a new contract before dropping your 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 to find the right balance for you. Don't let these common myths throw you off.
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