Monday, February 26, 2018
7 Life Insurance Myths
When it comes to getting life insurance it is important to understand what you are getting. I come across older clients all the time who are confused about their policies from long ago. It is not their fault as more than likely they were not explained the product properly. Some guy wearing a slick suit probably knocked on their door, explained to them the value of their policy, and they settled it right there. Getting back to basics is important and so is dispelling any myths associated with life insurance. As part of my practice, I believe that pretty much everyone needs life insurance. In my eyes, the only questions are what product and how much. To show you why I believe this, I am going to discuss 7 life insurance myths that exist. There is a lot of false information in the financial world, it’s my goal to rid our world of some of it.
1) I am young and single, I don’t need life insurance
This is sort of a half-myth. While when you are young the need for life insurance may be less, it still exists. Do you have loans that were co-signed by a family member or friend? Do you care if your family is on the foot for unpaid medical bills? Do you want someone else to pay for your burial costs? Do you wish to care for your parents when they get old? What if you predecease them? All these reasons are very valid but the most valid one in my mind is that life insurance for young people is literally dirt cheap. You are the healthiest you will ever be, so it is a perfect time to lock in cost and coverage. Policies can cost less than the price of 2 beers at the bar so there really is no excuse.
Millennials aren’t buying life insurance, but should they? – CNBC
2) I have no dependant’s, why should I get life insurance?
Well, neither do I, and I still have life insurance. The reason why is simple: I am willing to sacrifice a little money every month because I do not want my family to have a financial burden if I die young. At a time when everyone around them will be demanding money, the life insurance company will be coming with a cheque. I want the happy moments to be the memories, not the bills left behind. I also want to lock in my health while I am younger, so it is cheaper as I get older. I also know that starting a family one day is a goal of mine, so I wish to be prepared for that. The investment component of Whole Life Insurance is an interest of mine as well, so securing that product was important. There are many reasons for someone without children to get coverage.
3) I have coverage through work
Do you? Workplace coverage is great for a couple reasons. First, it is cheap, very cheap. Secondly, you do not have to pass a medical to get it. Other than that, it is very spotty coverage at best. The reasons are simple. In most cases, it is not enough. Workplace coverage gives you a multiple of your annual income, usually 1-3 times your salary. So, if you make 50K a year, you may only have 50K in coverage. Is that enough for your family to get by on if you die? Also, workplace coverage is not portable. So, if you leave the job you lose the coverage. This becomes extremely worrisome when you get older and possibly uninsurable. You wouldn’t believe how many 60-year old’s that have called me asking if they still qualify for life insurance. Some do, and some don’t. While a small amount of workplace coverage might be enough for you today, in the future I assure you it won’t be.
4) I have coverage through the bank
Just a heads up on this one, no you don’t. Bank’s carry what is called creditor’s insurance. This product is the dollar store brand variety of life insurance. Ever wonder why they keep calling you and flooding your mail with flyers for it? The reason is simple: It is a piece of trash product that is easy for them to push. Creditor insurance covers a debt. If you die, it pays your debt off to the bank. That means that the bank is the beneficiary, not your loved ones. It can also be expensive. If you have Lines if Credit or Credit Cards with balances, you may be paying over a hundred dollars a month for this coverage. You can get 20 times the coverage for a fifth of the price if you applied for personal life insurance. Also, if no one else has co-signed on your debts, they are not on the hook for it when you die. Don’t let them guilt you into buying an inferior product. Get insurance that you own, not the bank.
Don’t get caught out by balance-protection insurance – The Globe and Mail
5) I have investments, so I don’t need insurance
Having investments is amazing and I applaud anyone that has taken the time and effort to save and invest. What puzzles me about people and their investments is that sometimes the reason for having them may change over time. For instance, when you opened your RRSP it was because you wanted a retirement nest egg. Was it to pay off the family home should you die prematurely? When you bought the house, the goal was to pay it off and live comfortably in later years. Was one of the reasons to provide your family money should you get sick? Investments are for specific goals. Insurance is to protect those goals. There are only 2 times you should ever access your RRSP before you retire:
- The Home Buyer’s Plan
- The Lifelong Learning Plan.
Other than those two times, retirement funds should be used for during retirement only. Doing so before could delay or eliminate your retirement goals completely. It also will leave you with a huge tax burden at a time when you are hurting the most.
6) Buy term and invest the rest
I like this theory, but only a little bit. It is far too broad for me to fully subscribe to it. There are many situations where whole life insurance is a valuable tool. Whole Life insurance has an investment component within it that grows over time. You get the face value death benefit immediately and later, cash value you can borrow from or surrender if you wish. For those with small insurance needs like final expenses, whole life insurance is a perfect product. Term insurance will not cover you past age 85 for most policies so if you live longer than that you are out of luck. Whole life insurance also helps ease the tax burden you may have when you die. For instance, if you wish to leave the family farm or cottage to the kids, they will have a huge tax bill created by that. Permanent coverage is the only way to alleviate that burden. It leaves money to your beneficiaries tax-free which investments do not. Only your spouse will receive the roll-over from your investments without tax.
Buy Term and Invest the Rest???? – Budget Boss
7) I have little or no income, so why would I need coverage
This situation often arises when there is a breadwinner in the family. Not only is the parent who stays home with the kids very valuable, they do have a dollar worth to them. Think about the costs associated with childcare if the family caregiver should pass on. While your children are young, this could run into the hundreds of thousands of dollars. Will you need a nanny? Will a family member help ease the stress? While you might not make an income, you do have worth that often isn’t equated in dollars. There is also the burden of expensive medical costs and final expenses should the worst happen. Thinking a caregiver is not as valuable as the breadwinner is an old school mentality that needs to be quashed immediately.
An open and frank conversation regarding life insurance should happen once you become an adult. It is truly one of the most important decisions you could ever make. For some, it could mean the difference between achieving goals and living in poverty. For everyone, including myself, the peace of mind alone is worth the cost every month. I know it was one of the smartest and most selfless things I have done so far in my life.
Thank you for tuning in as we begin Insurance Week at Budget Boss. Join us tomorrow as we discuss insurance as income protection. If you would like to find out what type of life insurance is best for you, please do not hesitate to contact me at joe@budgetboss.ca. Have a great day Bosses!
“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.” – Suze Orman
Email – joe@budgetboss.ca
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