Life insurance differs from other common forms of insurance such as home/auto or group insurance from work. That means you may have misconceptions about life insurance. The clarification is often in your policy contract. You can request a sample before you buy.
Here are the biggest myths:
There’s no death benefit for suicide
During the first two policy years, suicide usually results in a refund of the premiums. This removes the financial incentive to pay a small premium to get a large death benefit quickly.
For suicides after two years, the death benefit is usually paid. Why? Life insurance protects the beneficiaries.
If you’re misclassified by age or gender, the life insurance company will usually adjust the coverage to match what the premiums would have purchased with the correct information. That’s not the case if you’re a smoker but say you’re a nonsmoker. This is considered fraud. That means:
- no death benefit
- no refund of premiums
This may seem severe but insurance companies aren’t flexible in cases of fraud.
What if you only smoke occasionally? Make sure you meet the insurance company’s definitions rather than making your own interpretations. If you stop smoking for a year, you can often apply for non-smoker rates.
Better to “buy term and invest the difference”
Permanent cash value life insurance allows tax-sheltered growth, much like an RRSP or TFSA. You’ll find articles which say it’s better to use the same premium amount to (1) buy term life insurance, and (2) invest the balance elsewhere.
This logic assumes that
- you will invest the difference
- you will earn better returns
- you don’t need permanent life insurance
You might find that you get better results with permanent cash value life insurance.
You don’t need life insurance if you’re single
Maybe you do. For reasons why you need life insurance, read Do Single People Need Life Insurance?
You don’t need life insurance if you’re a widower
Maybe you do. For five reasons you might need life insurance, read Do You Need Life Insurance if You’re Widowed?
Premiums aren’t guaranteed
With car and home insurance, your premiums aren’t guaranteed and can change every year. With life insurance, the mortality rates are usually guaranteed with
- Term life
- Term 100
- Universal life insurance
The main product where you lose the guarantees is whole life insurance which has mortality rates that increase each year (called yearly renewable term or YRT). The overall premium may be guaranteed but if the components aren’t you don’t really have a guarantee.
You won’t be caught if you fib on the application
Life insurance applications require you to be truthful. There’s a two-year contestability period during which insurance companies investigate claims more carefully. For fraud, there’s no expiry date for an investigation.
Since life insurance is intended to provide for your beneficiaries, being truthful is very important. If you’re unable to get regular life insurance, you might qualify for a guaranteed issue product.
Term life insurance is enough
There’s a common feeling that you only need term life insurance. When you’re young and have financial commitments such as a family or mortgage, term life insurance provides the maximum coverage for the lowest price. As your children leave and your mortgage gets repaid, your assets build. Permanent life insurance helps preserve your estate by providing money to cover your final expenses and taxes.
You can buy on price
Life insurance isn’t a commodity like salt. The brand does matter. You can’t buy on price. Life insurance is a promise. Insurance companies have different reputations. Products aren’t identical either. You’ll see the differences if you take time to look at the nuances.
You don’t need other types of insurance
During your working years, you’re much more likely to suffer from a disability or critical illness than to die. In your later years, you face the risk of needing long-term care. Life insurance isn’t the answer but there are other forms of insurance which are.
Buying online saves you money
Buying life insurance online looks convenient but doesn’t mean you’re saving money. Direct-to-consumer products tend to have more limitations. You also don’t have an easy way to get independent advice unless you investigate several products on your own. Time is money too.
You can get life insurance whenever you want
You qualify for life insurance primarily with your health—which can change anytime. Ultimately, the insurance company decides whether you qualify. Their evaluation process can take weeks. Your health must not change during that period. Get insurance while you still can before you need it.
Get a life insurance quote now.
- The 5 Lamest Reasons for Not Getting Life Insurance
- 9 Life Insurance Mistakes to Avoid
- When to Buy Both Term and Permanent Life Insurance
Flickr: Laura Gilmore