Life Insurance Misconceptions

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The biggest misconception about life insurance is that it’s expensive. According to a 2017 study by LIMRA (the Life Insurance Market Research Association): “When asked how much a $250,000 policy would be for a healthy 30-year-old, the median estimate was $500 — more than three times the actual cost.”

In reality? “Life insurance is one of the most efficient financial vehicles in terms of value for your dollar,” says Chris Abrams, Founder at Abrams Insurance Solutions. Term life coverage typically costs between $120 and $240 per year, or $10-20 per month. That means for the same price as a Spotify subscription, you could secure up to $250,000 of coverage for your family or dependents.

The idea that life insurance costs a few hundred dollars per month reflects the cost of whole life insurance. Whole life insurance is much more expensive than term, both because it guarantees a death benefit payout and because part of your premium goes toward a cash account. You can read more about the different kinds of life insurance here.

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Life insurance for your household’s main breadwinner is a good place to start. LIMRA’s 2018 study found that more than one in three American families (35%, to be exact) “would feel adverse impacts within one month if the primary wage earner died.” But what about secondary wage-earners and stay-at-home spouses?

In fact, says Dave W. Griffin Jr., Vice President at The Dowd Agencies LLC, “the loss of either spouse/ parent will change a household’s financial landscape.” Consider the cost of child care alone: Care.com found that the national average for in-center care is almost $10,000 per year. For in-home care, it’s a whopping $28,000 — tens of thousands that would have to be paid throughout childhood if a stay-at-home parent passed away.

There are services beyond child care to factor in, too. “It’s difficult to put a monetary figure on home and family management,” says Griffin, “but the value of these contributions is significant.” Think about errands, housekeeping, transportation, taking care of pets — things that might have to be outsourced if a two-adult household suddenly became a one-adult household. Life insurance can help cover these types of costs.

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Since life insurance kicks in when you pass away, it’s easy to overlook when you’re young, healthy, and nowhere near post-life planning. But there are a few reasons to consider buying coverage early in life.

The first, and most obvious, is that you never know what may happen. Since post-life expenses can add up quickly, it’s important to protect your loved ones or dependents financially with an appropriately-sized death benefit.

That said, there’s another, more compelling reason to consider life insurance early on: You’re going to want life insurance eventually, whether because you have kids, a mortgage, car payments, business loans, etc. It’s cheaper to secure that coverage when you’re young, as prices only go up with age. And if your health declines before you buy a policy, premiums could skyrocket.

Buying life insurance while you’re young and healthy lets you lock in low prices over a long period of time — say, 20 or 30 years. If you choose a term life policy with guaranteed level premiums, you could be paying 25-year-old prices (think $11 per month) when you’re 55.

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Employer-sponsored life insurance generally provides a death benefit of one to two times your salary for free, so it’s a smart decision to sign up if you have the option. But is two times your salary enough coverage? Often times, the answer is “no.”

“If you are single and have no children,” says Dave W. Griffin Jr. of The Dowd Agencies LLC, “a plan offered through work may be sufficient. But for families, additional coverage is usually warranted.” Mortgages, childcare, college education, and other large financial obligations can easily exceed a couple years’ salary. And if coverage doesn’t stretch far enough, family or dependents will end up shouldering leftover expenses.

We recommend using a life insurance calculator — like this one from Life Happens — to determine your coverage needs. You may find that you want an inexpensive, individual term life policy to supplement your workplace benefits.

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“One adage that needs to be debunked is the idea that everyone should buy term and then invest the difference,” says Adam Hyers, founder at Hyers & Associates Insurance Group. This old argument — that cheaper term life paired with traditional investing trumps than whole life — is true for a large number of people. But it certainly isn’t universal.

Many people with large estates will find whole life insurance to be a smart investment. If you’ve maxed out your 401 (k) or IRA, for example, it can act as a secondary savings channel. It can also be used to cover complex estate planning needs, or as a tax-effective channel for inheritance. The best whole life policies will even add to your nest egg with annual dividends.

Hyers also recommends looking into universal life insurance if your needs fall somewhere between term and whole life. “It costs less than whole life, but can be carried for a much longer period of time [than term]. It also has benefits to the insured as well” — like policy growth opportunities, an accelerated death benefit if you become chronically ill, and a guaranteed death benefit in many cases.

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Even if no one else depends on your salary for their livelihood, you should still evaluate your life insurance needs. Take one example: a recent college grad, just starting their first job, who rents an apartment — no mortgage and no kids to worry about.

If this person were to pass away, their family could be held accountable for certain debts left behind, including private student loans. With the average debt for a 2016 grad resting just below $40,000, that’s no small consideration. You’ll also want to factor in final expenses (however distant they may seem right now). According to the National Funeral Directors’ association, the median cost of a funeral with burial is more than $7,000. That’s a hefty sum for surviving family members to pay out.

“No matter your situation, you’re an individual, not an island,” says Dave W. Griffin Jr. of The Dowd Agencies LLC. “Life insurance can be about extended family, close friends, business associates, even charities you support. At its most basic, it’s also about taking care of any debt or other financial commitments you may leave behind.”

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Many people are under the impression that they can’t get life insurance if they have a pre-existing condition. “This is absolutely not true,” says Mike Raines, owner of Raines Insurance Group and SpecialRiskTerm.com. “In fact, there are a select few highly rated insurance companies who specialize in underwriting or evaluating [risks such as diabetes, heart disease, MS, etc].”

Raines, along with other experts we spoke to, recommends contacting an independent agent if you have health concerns that may affect your life insurance application. Independent agents represent more than one company, and have a deep knowledge of the life insurance industry as a whole. They can point you towards providers that will be more forgiving during the underwriting process.

As Chris Abrams, founder at MJ Life Insurance, puts it: “There are more than 850 life insurance companies in the U.S., and each company will rate a certain health condition differently. The key is to work with an agent who can guide you to the one company that is more lenient and therefore least expensive for your particular health condition.”