Common Myths Concerning Life Insurance

2006-01-19

Savvy investors know that life insurance is the cornerstone of any successful portfolio. Life insurance provides powerful ways to create, protect, preserve and distribute wealth. By offering the insured a tax free way to swiftly distribute wealth to your family in the time that they need it most without having to wait on probate.

Myth #1 - Life insurance is a necessary evil.
Let’s face it no one wants to think about death. Therefore many people put off insuring there most important asset they own, their lives. Or, they choose a coverage amount without taking the proper planning steps.

Successful people realize that life insurance is a very effective tool to overcome financial problems created by death, especially premature death. Choosing the appropriate amount through is vitally important.

Myth #2 – You have to die for life insurance to be a good deal.
Life insurance tends to be thought of as only effective if you die very soon after you purchase it. This viewpoint is flawed because it fails to recognize the versatility of permanent whole life insurance. Permanent life insurance by design is a forced savings vehicle. Let’s face it, even the most affluent individuals have a tendency to spend rather than save. We hear people say all the time “buy term and invest the difference.” Well I don’t know about you, but I have yet to meet even one person who has successfully done this over the long haul. Most people will simply “spend the difference.”

By purchasing a permanent life insurance policy, you are saving as you pay your premiums. As the policy ages, you build funds you can access tax free. If for some reason you were to die during the funding period of the policy, your family would receive the death benefit of the policy allowing them to still accomplish goals laid out as a family like education, debt payoff, donations, etc.

Myth #3 – It always makes since to buy term and invest the difference.
This theory is based on the concept that term life insurance premiums are initially less than permanent life insurance premiums. Therefore you should buy the term policy and invest the difference in some type of investment account. Based on current assumptions, the thinking is you will have more money saved over 20 or 30 years rather than just purchasing the permanent policy in the beginning.

In the wake of 9/11, many people lost millions in investment accounts while owners of permanent policies continue to see cash values grow because the policy contract has a minimum guaranteed interest rate (usually ranging from 3-4.5%).

Also, you have to remember that once a permanent policy is put in place, the premiums do not increase like a term policy will do. For instance, let’s say you opt to purchase a term policy with a premium of $30/mth over a permanent policy with a $65/mth premium for the same face amount today. But 15 years from now the same term policy now costs $125/mth and you have had some health problems. Now you are paying more for the term policy, have no cash value, and can’t get a permanent policy due to your health.

But in a simpler explanation from my perspective is that everyone has two different kinds of needs – permanent needs and temporary needs. You wouldn’t fix a leaky pipe with a bandage, so why insure a permanent need with a term policy.

Permanent needs include burial costs, donations to charity. These needs are permanent because no matter if you are 77 or 27 you will have some burial costs. Temporary needs include mortgage loans, educating your children, emergency funds, other debts like cars, credit cards, etc. These are temporary because I am sure we all have the goal of being debt free one day. But, don’t be fooled, because if you don’t aggressively attack your debt and set up a clear plan to eliminate your debt, it can easily become a permanent need.

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