Debunking life insurance myths
Last week, I wrote about why you may still want to consider life insurance—even if you’re single and child-free. This week, I’m continuing with the life insurance theme by debunking 10 of the most common life insurance myths. (How many have you come across?)
Myth 1: I can self-insure by saving and investing
In the FIRE community, we love to self-insure. After all, many of us are accomplished savers and investors. We can, in many situations, do better by self-insuring. For example, we can safely self-insure for things like product warranties, pet insurance, and minor medical expenses. Expenses like these are unlikely to create a financial catastrophe.
However, self-insuring our life (aka human capital) is another story. That’s essentially what we’re doing by working towards FI—to eventually self-insure our human capital. Until we reach FI though, we’ll need a way to cover our human capital.
This is a situation where insurance is necessary and justified. Term life insurance is a simple, affordable way to insure your human capital and protect your loved ones.
Note: Some Twitter users mentioned that disability insurance is another important component when insuring your human capital—they’re right. Be sure to also consider how much disability insurance you’ll need in case of injury, illness, or other disabilities.
Myth 2: I’m covered at work—that’s good enough
This life insurance myth is a common one, but the truth is: your employer-provided life insurance is likely not enough. In most cases, you’ll only receive one year of salary (and sometimes, far less).
If you’re very close to FI, this may be all you need. You’re one of the lucky ones and can skip getting additional life insurance! However, most of us are still a ways off from reaching FI, so one year of salary isn’t going to cut it.
Check with your HR or payroll department to confirm what your life insurance covers. If it’s not enough to cover you until you reach FI, you should get additional coverage.
Myth 3: Once you buy a home, you need life insurance
This is a life insurance myth that a relative and I recently discussed. He’s single and has no dependents, but still felt that buying life insurance might be the right thing to do.
This isn’t necessarily a given—you need to look at your entire life situation and the goals you have for your estate. Homeownership doesn’t automatically mean you need life insurance. (I discuss this in more detail in my previous post.)
Myth 4: Mortgage insurance is all I need
Ugh, mortgage insurance! I try not to get overly opinionated or preachy here, but mortgage insurance is something I’d strongly advise you to avoid. Here’s why:
- It’s usually more expensive than life insurance.
- The coverage declines as you pay down the mortgage but premiums stay the same!
- The only beneficiary is the bank.
- There’s no flexibility with the death benefit—it can only be used to pay off the mortgage.
- You can’t transfer the policy if you switch mortgage lenders.
Term life insurance is, by far, the better option to cover not only your mortgage but other expenses should you pass away.
Myth 5: You only need to replace ‘X’ times your income
This life insurance myth oversimplifies the math. To accurately calculate how much you’ll need, there are many other factors to consider, such as:
- How much mortgage and other debt you have.
- How much life insurance coverage you already have (e.g. through work).
- How much you have in investments and savings.
- If you’re planning to pay for your children’s education.
- What your monthly expenses are.
- If you’d like to cover funeral costs.
- If you’d like to leave bequests to beneficiaries and charities.
Myth 6: Stay-at-home parents need less coverage
This was a life insurance myth that my husband and I once believed. After all, there’s so much focus on replacing ‘X’ times your income (see Myth 5 above)… and stay-at-home parents don’t earn an income.
Well, the truth is: stay-at-home parents (like me) are priceless and you can’t even begin to replace us! Ha ha! Seriously though, you actually can put a price on how much it would cost to replace a stay-at-home parent.
For M and I, the math was simple: we wanted enough coverage so that, if anything happened to me, he could quit his job. We’d want him to immediately reach FI so that he could take over all the things I did at home. That meant equal life insurance coverage for each of us.
For other households, the math might be different. For example, if the surviving parent wants to continue working, they’d need to figure out how much it would cost to pay others to do what their partner used to do (childcare, cleaning, driving, cooking, etc.)
The math could also change if the surviving partner will have family to take over much of the childcare. Another factor is if the kids are old enough and childcare is no longer necessary.
All this to say: don’t just assume that you need less coverage to cover the death of a stay-at-home parent. Consider all your options and what the surviving partner wants their life to look like.
Myth 7: Single, child-free people don’t need life insurance
While this is often true, it’s not always the case! In my previous post, I listed the many (sometimes surprising) reasons why a single, child-free person may still want to consider life insurance.
Like many of the myths I’ve listed here, we can’t base our life insurance decisions on broad assumptions. We need to consider our individual situations then get sound advice to make a final decision.
Myth 8: Kids need life insurance too
Unless your child is the breadwinner for the family, it’s unlikely that getting life insurance for them is worthwhile. (Note: you can’t actually buy term life insurance for kids, but you can add coverage for them as a rider on your own policy.)
Some argue that kids’ life insurance can help with funeral costs and allow parents to take time off to grieve. While this may be true, I still think you’re better off saving and investing the premiums so that you can self-insure.
Actually, child term riders can be a good choice
When I get something wrong, I always try my best to own up to it and/or correct my error… and this is one of those times! When I posted this article in the ChooseFI Canada sharing thread, another member pointed out that child term riders can actually be a wise choice.
That’s because they’re inexpensive (about $2–$5 per month) and, most importantly, they guarantee the child’s insurability. Here’s more from Shannon MacDonald (a financial planner and the ChooseFI Canada member who alerted me to my error):
“When the child reaches adulthood they are able to qualify for their own policy, without any underwriting. Anyone who has been turned down for life insurance (or has to pay astronomical premiums) due to a health condition, can surely appreciate the value of that.”
There are, of course, some caveats to this coverage:
- You’ll need to keep the policy until the child is old enough to convert to an adult policy. (If you no longer need life insurance, you can reduce your coverage to the minimum just to keep the policy open.)
- Your child must hold their policy with the same insurer.
- You’ll have to answer some basic medical history questions about your child when you add them to your policy. (However, future children are covered at no extra cost, with no medical questions.)
- If your child already has a health condition, that may affect their ability to access coverage. (However, any conditions developed after being added to your policy will not have any affect.)
If I’d known about this option when we still had many years of life insurance ahead of us, I would’ve seriously considered adding my kids to our policy.
However, seeing as we’re relatively close to FI (and no longer needing our policy) and our kids are healthy and many years away from needing coverage, this isn’t a clear decision!
I’ll definitely give it some thought and maybe even get some quotes to make a final decision. Either way, now you know, and can make the best choice for your family. 🙂
Thanks again to Shannon for her valuable feedback!
Myth 9: Life insurance payouts are taxable
Fortunately, this life insurance myth is completely false. It may be hard to believe, but CRA does not tax life insurance payouts. This means the entire death benefit goes to your heirs.
It would be wise to keep this in mind when naming beneficiaries for your estate. I’ve heard of deceased parents giving different assets to each child (e.g. RRSPs to one, family cottage to another, and life insurance proceeds to a third).
While the assets were of approximately equal value, the differing tax rates on each meant the children received unequal shares of the inheritance. This scenario could be avoided with proper estate tax planning.
Related: In FI School Lesson 15: Estate Planning, I’ve collected a wealth of resources to help you develop your own estate plan.
Myth 10: Life insurance is expensive and hard to understand
This life insurance myth used to be true. In years past, there were far fewer options to purchase life insurance and little info to be found. In addition, the purchasing process was often confusing and high-pressure.
We’re very fortunate now to have easy, transparent ways to learn about, get quotes for, and purchase life insurance. It’s never been easier to buy life insurance. (I say this from personal experience, having had to apply for and purchase new life insurance policies three times in my life!)
Related: Read my review of PolicyMe—Life Insurance Made Easy
Summing it up
Don’t let life insurance myths stop you from getting the coverage you need (or purchase more than necessary). Get educated on life insurance so you can protect your loved ones with the right coverage, at a fair price.
Get your personalized quote today!
Get a free, no-obligation life insurance quote in minutes by using the widget below or visiting PolicyMe.com. They’ll compare and find the best prices for you—from multiple providers.
In addition, PolicyMe’s friendly insurance advisors are available if you have questions or a unique situation to discuss.
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