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3 Myths of Life Insurance…and Other Useful Tips!

David Bialecki
Jul 30, 2018
3 min read

Buying life insurance can be one of the worst experiences you can have. Most of us don’t want to face our own mortality. Agents know this and will try to take advantage of you by selling you something you don’t want or need. It never gets cheaper since each day you’re one day closer to death. Avoid these three myths, and you’ll end up with the right policy without all the hassle.

MYTH #1: LIFE INSURANCE IS AN INVESTMENT

Insurance, of any kind, is replacements of an asset, in this case your income. Life insurance is unique in that agents sell as an investment, mainly because they know we fear our own mortality. We tend to panic because we can’t speak for ourselves since we’re dead! It should be called death insurance, but that would be a bad sales pitch.

The investment portion of the policy is the “cash value”. It’s designed to match the death benefit when you reach 100 years old. It is not part of the policy. You never get both. For example, let’s say you have a $500,000 policy that has accumulated $20,000 in cash value. If you decide to cancel your policy, you’ll (most likely) get $20,000. If you die, you get $500,000. You may be asking why I don’t get $520,000. I would. The cash value becomes “part” of the policy.

The two most popular types of policies are Whole Life and Universal Life. These types are quite profitable to the insurance company because the cost so much. The agent’s commission can be as much as 85% of the first year premium! Companies usually quote insurance prices in amount per thousand or unit. In our example, let’s say it costs you $10 per unit. For a $500,000 policy, the cost would be $5,000 per year (500,000/1000*10). That’s quite expensive. Most people just buy less insurance to fit their budget. The problem is they don’t have enough protection. The agent never mentions that. Of course, you can buy a term policy for a fraction of the cost, but agents don’t push those because they don’t make much money! Another red flag is if the agent starts using industry jargon to confuse you. Just buy term and invest the difference yourself. That way you get both!

MYTH #2: EVERYONE NEEDS LIFE INSURANCE

If someone will miss your income if you die, then you need life insurance. If not, save your money and invest it yourself. The two main determinants of how much coverage your need are your current financial position (income, savings, debt) and how many dependents you have. A good rule of thumb is 8-10 times your income or your income / .08 (conservative expectation of ROR on your investment.

MYTH #3: YOU DON’T NEED TO WORRY ABOUT YOUR HEALTH

Those no medical exams claims you see on TV are only for low death benefit policies. However, the cost-per-thousand is quite high. If you want a larger death benefit, you will absolutely be required to get a medical exam, usually by a doctor of the insurance company’s choice. Be truthful when filling out an application. They will find out if you aren’t. The biggest red flag: SMOKING!

Here are some other tips to keep in mind when shopping for life insurance.

It pays to shop around. Insurance (of any kind) is a highly competitive industry, and companies do use different actuarial tables.
Find out how agents are paid (fees vs commissions). Commission based agents may not have your best interests at heart. Also, confirm they are licensed in your state.
Check your state’s insurance department for company ratings. Moody’s and S&P are also quite useful. Is there anything worse than a company filing for bankruptcy the day before you take that trip high in the sky?
Review policy every few years as your circumstances can/will change
Choose beneficiaries wisely
You have a 30-day free look period after you purchase a policy
Stay away from riders, disability premium waivers, and double indemnity coverage. They’re not worth the cost
Don’t close out a whole life or universal policy if you’ll lose some/all of the premiums invested in cash value. Instead, buy more term insurance
Finally, if switching policies, don’t close the old one until the new one is in effect