By Mike McGinness
Single people or couples without kids don’t need life insurance. Life insurance is too expensive. Stay-at-home parents do not need life insurance because they don’t earn a paycheck. These and other misconceptions surround life insurance, a product that most consumers may need, but many still do not understand.
“Many Americans either don’t have a life insurance policy or don’t have enough coverage to meet their immediate or long term financial needs,” said Matt Easley, Vice President of Life Products, Allstate Life Insurance Company. “The low level of Americans’ personal savings has increased the need for life insurance to protect their family’s future.”
Interestingly, according to a 2004 survey from Allstate, 67 percent — or nearly seven out of 10 surveyed — felt their life insurance was adequate. On average, respondents reported owning four times their household annual income of life insurance coverage.
For families who have already incurred many of life’s big expenses — like buying and financing a home or sending children to college — four times their income may be enough.
Yet, on the other hand, younger families with decades of financial obligations ahead may not have enough life insurance coverage to realize their goals. For example, as a rule of thumb the recommended amount of life insurance coverage often cited is seven times an individual’s income, although individual circumstances should be taken into account when estimating actual life insurance coverage needs.
In an effort to debunk the myths surrounding life insurance, Allstate and its member companies and divisions, including Lincoln Benefit Life Company and Allstate Workplace Division, offer the following realities:
Myth No. 1: Singles or couples without kids don’t need life insurance.
Fact: Life insurance can help provide for loved ones in the event of death, even for those without children. For example, people in this group may carry debts that they would prefer were taken care of rather than taken out of assets left to their loved ones. Still, others may use life insurance proceeds to help nieces, nephews, cousins or siblings achieve their financial goals. For a modest premium, life insurance can help to provide for those who are left behind.
Myth No. 2: Life insurance is expensive.
Fact: Term life insurance, which is life insurance purchased for a period of time, is very affordable for many people. For example, a healthy, non-smoking, 35-year-old female who has a good family health history may be able to purchase a 10-year term life insurance policy from Allstate with a $250,000 death benefit for an average of $14.66 per month. Or, she may be able to purchase a 10-year term life insurance policy from Allstate with a $500,000 death benefit for an average of $14.88 per month.* Either way, the premiums are approximately the price of two movie tickets per month!
Myth No. 3: Stay-at-home parents don’t need life insurance because they don’t draw an income.
Fact: While a stay-at-home parent may not provide an actual paycheck for the household, they do provide services that would cost tens of thousands of dollars to replace. These include: the cost of day care, a chauffeur or taxi service, a cook and a home cleaning service to name a few. An individual life insurance policy would help to ease the burden for the family if the stay-at-home parent should pass away.
Myth No. 4: You can take your life insurance policy with you from job to job.
Fact: Typically, group life insurance purchased through an employer isn’t portable – meaning if an employee leaves the job, he or she is probably also leaving the life insurance protection behind. However, because you own any individual life insurance policies purchased through an insurance agent or a financial professional, leaving a job will have no effect on the coverage provided by them. So, in that case, if you change your job, you will still have your life insurance policy even if you no longer have employer-provided group life insurance.
Having a policy through an employer is also becoming a rarity. According to a 2004 U.S. Department of Labor Bureau of Labor Statistics Employee Benefit Survey, fewer workers have life insurance benefits. The number has declined eight percent since 1999, from a high of 56 percent to 48 percent in 2004.
Myth No. 5: Your beneficiaries will have to pay income taxes on the proceeds of your life insurance policy.
Fact: Life insurance death benefits are generally income tax-free; yet very few people know this. According to LIMRA** International’s Individual Life Buyer Consumer survey, only 34 percent of those surveyed knew their death benefit is tax-free. Note, however, that death benefits are subject to estate taxes if the insured owned or had any ownership interest in the policy.
Myth No. 6: You are not covered by your life insurance policy if you travel.
Fact: In the unlikely event an insured passes away while in a foreign country, the policy would most likely pay out to the beneficiaries. However, many life insurance policies exclude certain countries, such as those currently on the U.S. Department of State’s Current Travel Warnings List; so it’s important to review a policy prior to leaving the country and talk to your agent or financial professional if you have any questions.
Myth No. 7: Term life insurance policies can’t be converted to permanent or whole life insurance policies.
Fact: It is possible to convert a term life insurance policy into a permanent policy, depending on the policy purchased. However, individuals seeking to do so should expect an increase in premium. In addition, the conversion may have certain limitations or require renewals. Many people like to purchase term insurance, which tends to be less expensive, while they’re younger because it may make obtaining a preferred premium easier when they attempt to convert later.
Myth No. 8: You don’t need life insurance once your children are adults.
Fact: Life insurance can help achieve a goal of leaving an inheritance to children or other loved ones or help relieve the burden of paying for final costs such as a funeral or final medical bills.
Myth No. 9: Kids don’t need life insurance.
Fact: Parents mistakenly think that since kids don’t earn an income, they don’t need life insurance. The reality is that there are several good reasons why buying life insurance for children makes sense including: 1) Lower premiums, and 2) Ensuring a child’s future insurability in the unfortunate case that they become ill and thus will not qualify for life insurance.
Myth No. 10: People don’t need life insurance if they feel they have enough in savings.
Fact: Most Americans do not have enough in their personal savings. According to a June 2005 U.S. Department of Commerce Bureau of Economic Analysis, the personal savings rate as a percentage of disposable personal income was 9 percent at the end of the first-quarter 2005. If people don’t have enough saved, most likely their family won’t be able to pay off final expenses or be able to hold onto assets like a home. A suggestion for those who may feel that purchasing life insurance is just another bill to pay is to have the premiums automatically paid with after-tax money from a paycheck.
Local Allstate agent Mike McGinnis operates Main Street Insurance, 214 Main St., in downtown Edmonds.