Death is uncomfortable to think about. Most of us prefer not to contemplate what will happen when we die, let alone how our loved ones will respond. It often takes a disaster or tragedy that’s impossible to ignore, such as a serious health scare, to finally make us take the subject seriously.
But a reluctance to confront death is detrimental to long-term financial and family planning. A truly comprehensive life plan includes what happens after we’re gone.
Life insurance plays a huge role in determining what happens after we die: how our debts are settled, what our estate and heirs do with our assets, and how our loved ones cope with our loss — both financially and emotionally. Delaying the application process is never wise, even if death feels like a far-away abstraction.
Some persistent myths about life insurance further tempt us to delay. Even those with a grain of truth are far from ironclad, and some have no basis in reality whatsoever.
Pro tip: If you don’t currently have a life insurance policy in place, get started today. Companies like Bestow allow you to apply online in minutes with no medical exam needed.
Most Common Myths about Life Insurance — Debunked
These are the most common misconceptions about term life and whole life insurance (also known as permanent life insurance). Many myths arise out of common misconceptions about how life insurance works, and what and who it’s good for.
Myth #1: You Don’t Need Life Insurance If You’re Single or Have No Dependents
A life insurance policy can be a vital financial safety net for the policyholder’s spouse and children. But that’s not its sole purpose, even when the policyholder’s primary goal is minimizing the financial pain of their premature death.
Regardless of their relation to the policyholder, policy beneficiaries can also use the proceeds to:
- Settle debts not discharged in death or ensure they stand to inherit something after the policyholder’s estate settles the policyholder’s debts
- Avoid selling assets to pay off secured loans, such as a first mortgage or home equity line of credit — a common occurrence when a homeowner dies before paying off their mortgage
- Cover the policyholder’s final expenses, such as burial and funeral costs, if they die without adequate savings
Life insurance proceeds can provide more specific forms of financial protection to beneficiaries outside the policyholder’s immediate family:
- Providing cosigners of major debt obligations, such as private student loans or home loans, with a windfall great enough to settle the debt without impacting their personal finances
- Providing adequate financial resources to aging parents facing significant medical or long-term care costs
- Protecting the financial interests of a business partner, an arrangement commonly known as key person insurance
Finally, life insurance proceeds frequently benefit immediate relations who don’t technically qualify as dependents, such as competent adult children over age 18 or minor children living full-time with a former spouse or domestic partner.
The fact that you can’t or don’t claim any dependents on your income tax return doesn’t mean you have no one to name as your life insurance beneficiary.
Myth #2: You Only Need Life Insurance If You Have Significant Income
In a strictly monetary sense, the value of one’s life closely correlates with one’s earning power. But that’s not the same as saying the death of someone without significant income causes little or no financial harm.
To cite just one example, the death of a stay-at-home parent with full-time child care and household responsibilities is likely to cause immense financial strain for the surviving parent.
If the survivor continues working, they must quickly find alternative child care arrangements. If not, they must modify their work schedule and probably forgo some income as a result.
And over time, the traumatic departure of a parent and the parent’s absence itself cause all sorts of secondary effects, such as necessitating mental health treatment for the surviving children and parent.
While stay-at-home parents might not need as much life insurance coverage as a primary breadwinner, their policy needs to cover the expected cost of alternate child care arrangements and offset the surviving parent’s loss of income, if any.
Even more importantly, their policy’s term length needs to extend past their youngest dependent’s 18th birthday.
Myth #3: Employer-Sponsored Life Insurance Is Adequate for Most People
Employer-sponsored life insurance is a useful supplement to an individual policy purchased on the open market. But it’s rarely adequate on its own. Most importantly, employer-sponsored life insurance often isn’t portable, which means it’s worthless if you switch employers.
Also, for high-earning policyholders, relatively low maximum death benefits (often $25,000 or $50,000) aren’t adequate to replace income. Unless your income is modest and you plan to stay with your employer for the long haul, your employer-sponsored coverage is unlikely to suffice.
Myth #4: You Don’t Need Life Insurance When You’re Young
It’s fair to ask why you should feel any urgency to apply for life insurance when you’re young and healthy. You’re unlikely to die in your 20s or 30s, after all. Why not wait until you’re older and likely have more health issues?
Two reasons: cost and caution.
On the first point, life insurance premiums are lower for the young and healthy than for older applicants with known health issues. You’ll pay a lot less for a 30-year term policy at age 25 than at age 40 because you’re much more likely to die between age 55 and 70 than between age 25 and 40.
Likewise, tragedy can strike anywhere at any time. Younger policyholders are more likely to have negative net worth — debts in excess of assets — or meager savings to pass on to their named beneficiaries.
Life insurance is especially important for young families with relatively low incomes and years of mortgage and student loan payments ahead of them.
Myth #5: You Can’t Get Life Insurance If You Have a Preexisting Health Condition
If you have a preexisting health condition, you can expect to pay more for life insurance than a perfectly healthy person of the same age. But in most cases, you won’t be uninsurable, and you certainly shouldn’t let the possibility of denial stop you from applying in the first place.
Use a comparison tool like PolicyGenius to shop around for life insurance quotes and compare your options.
If you’re denied coverage due to a concerning entry in your medical history or an anomalous result in a medical exam, try again, limiting your search this time to no-medical-exam policies. No-medical-exam coverage is surprisingly generous — typically topping out at $1 million to $2 million per policy, depending on the insurer.
Myth #6: You Should Save or Invest Instead of Paying for Life Insurance
Saving and investing are important. Your emergency savings fund should be big enough to cover at least three months of expenses and preferably six to nine.
On the investing side, you should contribute what you can to tax-advantaged retirement accounts — maxing out your annual contribution limits, if you can afford to do so — and maintain a taxable brokerage account for excess contributions.
Still, building a nest egg takes time. When you’re young, your liquid savings and taxable investments probably won’t be enough to settle your debts or provide a financial cushion for your family or dependents if you die. They almost certainly won’t be adequate to replace your expected income over the remaining years of your career.
Put another way, you wouldn’t expect to cover the cost of an overnight hospital stay or totaled car out of pocket, and you probably lack the financial capacity to do so anyway. That’s why you have health and auto insurance. Why should your life, which is far more valuable than your car, be any different?
Myth #7: Life Insurance Is Prohibitively Expensive for Older People
Because the likelihood of death increases with age, older applicants do pay more for life insurance. That’s why it’s smart to apply for life insurance when you’re young and healthy. Each year of delay adds to the cost of coverage.
But whether that cost ever becomes prohibitive is another question. Older people tend to have fewer obligations (including debts and dependents) and greater wealth than younger folks, so their life insurance needs generally decrease over time.
That aids older applicants in two ways: by reducing the coverage amount (death benefit) they need and by shortening the policy term. Both changes lower premiums.
So even if a 55-year-old policyholder pays significantly more per $1,000 in coverage than her 25-year-old daughter, her monthly premium remains manageable.
Many older policyholders take out only enough insurance to cover their final expenses — funeral and burial costs — so those costs aren’t a burden for their heirs.
Myth #8: Life Insurance Is a Budget-Buster
Life insurance is often cheaper than first-time applicants assume. Policies from Bestow start at just $5 per month. Although your policy’s actual premium will depend on your age, family health history, and medical exam results (if needed), you have ample leeway to reduce its cost.
Effective premium-reduction strategies include:
- Compromising on Coverage. Skip coverage for income replacement and focusing solely on providing for major current and future obligations, such as paying off your mortgage or funding your kids’ college education.
- Shortening the Policy Term. You’ll pay less for the same amount of coverage in a 10-year term than a 20-year term and much less for the same amount of coverage in a 30-year term. If dropping from 30 to 10 years isn’t feasible, consider a 20-year term instead — the savings will still be dramatic.
- Laddering Multiple Policies. If you know you’ll need coverage 30 years out, build a life insurance ladder that steps down coverage as you age. The typical ladder includes a relatively small 30-year policy, a moderate-size 15- or 20-year policy, and a smaller 10-year policy. Coverage is greatest during the ladder’s first 10 years when all three policies are in effect but remains adequate to address the family’s needs throughout the entire 30-year duration.
- Getting a Medical Exam. If you have no known health conditions, apply for a policy that requires a medical exam. Absent any unexpected red flags, exam policies cost less for the same amount of coverage than no-medical-exam policies.
Final Word
Unfortunately, most of these life insurance myths contain kernels of truth. Older applicants really do pay more for life insurance, even if they’re in excellent health.
It’s vitally important to save and invest for the future, even if you don’t have life insurance. And people without significant income don’t need as much life insurance as highly compensated breadwinners.
Yet none of these myths tell the whole story, and none of them justify putting off your life insurance application any longer. If you’ve relied on incomplete information to avoid completing your financial plan, the time for action has arrived.
