When it comes to life insurance, even savvy consumers can get tripped up by misconceptions. Unfortunately, mistakes you make when buying a life insurance policy can have long-lasting, negative financial consequences for your family. To help you avoid this, here are seven common life insurance myths you should consider.
1. I buy term life insurance and invest the rest. In addition to the fact that many people don't end up investing the difference they save by purchasing term insurance, there are many benefits to choosing permanent life insurance.
The recent large losses of the stock market demonstrate the value of having at least some of your money in safer alternatives. Permanent life insurance has guaranteed level premiums, a guaranteed death benefit and guaranteed cash value for life. Though not guaranteed, permanent policies have the potential for earning dividends. Savings within permanent life insurance grow tax-deferred, and loans from insurance1 are not taxed as ordinary income.
2. I'm young, single with no dependents so I don't need life insurance coverage. Even if no one else is depending on your income, you're still likely to leave behind bills, personal debts and final expenses, such as funeral costs. These expenses could be an unnecessary burden on parents or siblings during a difficult time.
Obtaining life insurance when you're young also allows you to lock-in the best possible rates and establish coverage, in case a later health condition makes it harder for you to qualify for life insurance. Also, the cash value you build up in a permanent life insurance policy can be used to fund an education, to start a business venture or to supplement your retirement income.
3. My kids have moved out and completed college. I don't need life insurance anymore. Even when your children are no longer dependents, life insurance can still be necessary to provide your spouse with supplemental retirement income, your children with an inheritance or your heirs with money to pay estate taxes.
4. I have enough life insurance through my employer. For many Americans, the amount of life insurance provided through their employers is not enough to adequately cover their dependants' needs. Generally, these policies are designed to be a benefit, not the "whole plan". It's important to ensure your coverage is adequate.
Also, your employer's policy probably is a group policy that only covers you while you're employed there. Since you'll lose your coverage if you lose or leave your job, you may want to consider purchasing an individual policy, which will ensure you'll have continuous coverage during a break in employment.
5. I don't work so I don't need life insurance. If you're a stay-at-home spouse, you may not produce an income but you probably provide important services, such as childcare, cleaning, laundry, cooking and errands, which are expensive to replace and may need to be hired out in the event of your death. Purchasing insurance on the nonworking spouse ensures the funds are available to protect your family's way of life.
6. I bought my life insurance policy over the Internet for the best deal. All insurance policies are not alike and the many nuances in product design that make comparison shopping online difficult.
But the real danger is you could get a great "deal" on a product that doesn't meet your specific needs. Life insurance is a product that is designed for the long-term with consequences that may impact your spouse and children decades from now. Therefore, the best way to purchase a policy is to meet with a financial representative in person to discuss your unique needs.
7. I own enough life insurance to financially protect my family. As a general rule, people significantly underestimate how much life insurance they need.
If you want an amount that fits your individual situation, start by evaluating your family's needs. Gather your personal financial information and estimate how much each of your family members would need to meet current and future financial obligations. Then add up all of the other resources your surviving family members could use to support themselves. This difference between their needs and the resources in place to meet those needs is the amount of additional life insurance you'll need.
For further help in determining how much life insurance you need, use Northwestern Mutual's Life Insurance Calculator or call your Northwestern Mutual Financial Network Representative.