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When it comes to life insurance, there’s a deluge of misinformation out there. This can make it a daunting task to discern what advice you should and shouldn’t take into account when you’re purchasing your policy. We’ve compiled 4 of the more popular myths to help you set the record straight:
1. It’s always best to buy life insurance when you’re young
It is true that your monthly premiums will be cheaper when you’re young, however, the overall cost of insurance is higher the longer you’re insured. Here’s what Chris Files, Financial Advisor at Van Winkle Insurance Group, says about it: “Buying life insurance when you are young can often be the most expensive way to pay for permanent life insurance. Whole Life and Universal Life (Permanent Insurance) is based on age defined mortality tables and fees. The monthly premiums will be the lowest but the long term expense will be the largest. Every permanent life insurance contract “rate of premium” is determined to age 100-120 unless predefined by the carriers to end at a sooner date. This often has the lowest rate of return because individuals are living longer and inflation will eat away at the policy dollar value. For example, if you purchased a $500,000 dollar contract today at age 25 and died in 55 years at the age of 80, the $500,000 policy today would only be worth $33,814 in today's dollars. I cannot tell you how many 80 year olds we meet that have $5,000 dollar policies from the 1950’s. These were great policies in the 50’s when the average home price was $2,390, but today, they will not even cover final expenses.”
2. Buy term and invest the difference
This is a common phrase you’ll hear mentioned when you start discussing life insurance. However, it’s not always true as David Bakke, Editor at Money Crashers Personal Finance, tells us. “Purchasing term life insurance and investing the difference between the premiums of the term life policy and a whole life policy is not for everyone. That being said, if you're a savvy investor, you can definitely come out on top by doing so. On the other hand, purchasing whole life insurance gives you the benefit of guaranteed cash value, something that term life insurance does not. It's also important to note that premiums increase over time with a term life policy, whereas they never increase with whole life. Thus, depending on the rates of return on your investment, you may end up worse off by "buying term and investing the difference." There's a big risk to this strategy inherent with any type of market investment, so you can't just blindly follow this statement and assume that you'll be better off. Your best bet is to consult a qualified insurance professional to determine which is the best strategy for you.”
3. Life insurance is a great investment
Julia Chung, head of the Wealth Strategies division at Facet Advisors, told us that's not typically the case. Her rationale? “Life insurance is first and foremost life insurance and secondly an investment opportunity. It can be a useful vehicle for investment purposes due to its tax-exempt nature but there are many rules and regulations around it. It's vital to understand these before proceeding, as life insurance strategies are long-term commitments. It's a great investment if your purpose is to leave behind a legacy at your death. It might be a tax-efficient investment strategy if your purpose is to utilize those funds during your lifetime. It's vital to have sophisticated advice when utilizing life insurance as an asset, as the strategies are sophisticated and not ideal for every single person in every single situation - but great for those that it fits.”
4. Everyone should buy life insurance
While your insurance agent may think this is absolutely true, Jennifer Lee, President at Modern-Wealth LLC in Bradenton, FL, tell us she doesn't agree. "There are some people who are older, unmarried, without children, a charity, or friends to leave money to. These folks plan to die broke. If this is you, then you have no need for life insurance.
If however, you are those same people who are ultra wealthy, again with no heirs, but you can not die broke or do not plan to die broke there are a ton of creative things that you can do with Life Insurance to pass your assets on to a charity or create a foundation leaving a legacy. It would seem a shame to give 55% to the government in taxes and then leave the rest to some very distant relative or to the State through your lack of beneficiary. Knowing the ultra wealthy, they typically would choose otherwise."