Mythology and misinformation are rampant in life insurance. This article will dispel some myths and give useful information to assist consumers in making rational decisions about the purchase of life insurance.
An earlier article, “Why Buying Term Insurance and Investing The Difference Is A Big FAIL!” was published. In an earlier article (“Why Buying Term and Investing the Difference is One Big FAIL!”), I explained why term insurance and investing in the difference are generally less expensive than buying cash value life insurance products. The vast majority of people don’t realize that buying term and investing the difference are the default. This means that the idea of building wealth through systematic investments rarely comes to fruition. In middle age, term policies can become very expensive, leading to people dropping their policies. Or, if they purchase a level term policy for a long time, say 10-20 years, they might find that their health is not good enough to insure them or that the price is too high to replace their expired policy. They often discover that the returns on their investment portfolio are not as good as the coverage they require for life insurance.
The second issue is about taxes. The “invest the difference” part of the equation almost always has tax consequences. Unrealized capital gains, dividends for nonretirement investment accounts, and other income will all result in a tax bill. This means that the tax liability is created when the fund manager purchases and sells stocks to make the portfolio. Reinvested dividends are also subject to tax. Both cases will result in you receiving IRS Form 1099s by mail in January each year. These forms will list the dividends and gains, and will need to be reported at tax time. Both cases will result in you having less money but more taxes to pay. This reduces your rate of return.
Whole life insurance products have no tax problems: the dividends grow without tax and the cash value can also be paid later in life tax-free. The death benefit, if it is paid out, is not subject to income taxes, although it may be subject to estate or gift tax.
Continue reading to learn more about life insurance. The biggest myth is that single young people don’t have to purchase life insurance. Popular financial publications propagated this myth. Life insurance is meant to safeguard survivors’ ability to stay financially solvent in the case of a deceased breadwinner. According to this myth, young people who are usually single don’t need life coverage.
Young, single individuals will almost always get the best premiums. Even substantial whole-life policies can be relatively affordable. Young people are often in the best of health and are therefore unwritten at the highest rates. The risk of having a rated insurance policy because of health problems increases with age, which can significantly increase the cost. These policies also have a shorter time horizon, so the cash value is lower.
A $500,000 policy at 21 with projections from a top-rated mutual insurer company will have a monthly cost of $320; waiting until 31 will increase the monthly cost to $470, while waiting until 41 will increase the monthly cost to $730, more than twice the premium at 21.
The cash accumulation is even more fascinating in each case: Starting the policy at 21 gives you over $600,000. At 65, the cash value is over $1,175,000 and at 31 it is just over $454,000. At 65, the cash value is over $454,000 with a death benefit of about $931,000. And at 41, the policy provides you with a little more than $322,000 cash value and a $754,000 death benefit.
Keep in mind that the death benefit required to provide a comfortable lifestyle for a family will increase with increasing income and responsibilities. The sooner you begin life insurance, the cheaper it will be, and the more you’ll have for your heirs. A guaranteed insurability rider allows a person to buy additional coverage at specific times and without the need to prove their insurability.
Next, the myth that an employer’s life insurance will provide enough income to support a family in the event of death is another. Most companies offering life insurance as a benefit will offer coverage equivalent to one year of salary. The employee has the option to buy additional coverage up to five times that amount. These policies are usually temporary and only last for the employee’s employment.
Another myth is that life insurance is only for those with dependents. Even if you are not married, it is a good idea to have a life insurance portfolio. Even if there are no children planned, the surviving spouse needs income to support a lifestyle and replace the loss of the spouse who died. If children are being planned, getting a life insurance policy in place when a person is young will help to reduce the cost of living as expenses rise. A permanent life insurance policy is a smart choice, especially considering the increasing number of children. The policy’s value has increased, the risk of developing health issues that could prevent them from being underwritten at an older age, and it is much more affordable to maintain a policy bought young.
The popular media perpetuates the myth that agents and life insurance brokers are more interested selling products that make them money than those that provide the best coverage. Most agents and brokers are ethical professionals. Agents and brokers will provide the best plans for their clients not only because they are ethical but also because it makes business sense. An agent who is a good fit for their clients will not only be looking for one-off transactions, but for a long-term relationship. He or she also wants to keep a good professional reputation. Words about agents doing wrong things just to get more commissions can spread quickly, and it can quickly destroy their reputation. This can also lead to the censure of or loss of licensure by the state insurance commissioner.
This article will discuss some of the most common myths agents encounter when dealing with potential clients. These myths are often perpetuated by journalists who don’t have the right training, authors trying sell books, and companies selling an “insurance solution” that demonize the rest in the industry. Although life insurance seems like a straightforward product, many people fall for the myths that I mentioned. Building the right insurance portfolio can be a complicated undertaking. It involves making decisions about your needs, finances, and long-term goals in order to find the right product combination that offers affordable and necessary protection. This means that you need to work with an expert in the industry who will find the best solution for your client. There is no one-size-fits all solution that will meet your needs.
