Life Insurance Myths & More

Life insurance isn’t exactly the kind of thing people like to talk about, but it is important. That’s why, when it comes to shopping for a good lpolicy, it’s important to separate fact from fiction.

Life Insurance Myths & More

Decreasing Whole Life Insurance

Interested in buying a decreasing whole life insurance policy? Handfuls of people are. There’s just one catch—this kind of policy doesn’t exist. Generally, life insurance comes in two types of policies: term and whole, or permanent.

Term Life: These policies pay out a death benefit if you die within the policy’s term. Popular terms include one-year, five-year, ten-year—all the way up to 30-year.

There are two types of term life policies: level term and decreasing term.

  • A level term policy means that the death benefit stays the same throughout the duration of the policy.
  • A decreasing term policy means that the death benefit decreases throughout the duration of the policy.

A decreasing death benefit isn’t exactly a desirable feature, so not many people buy this kind of policy. In fact, according to the Insurance Information Institute (III), 97 percent of term policies purchased in 2003 were level term policies.

Permanent/Whole Life: These policies pay a death benefit whenever you die, whether you pass on tomorrow or in 50 years. There are variations of whole life policies, each with distinct features. Some allow you to earn interest on the policy or invest part of the premium in stocks or mutual funds. These are the features that make permanent life policies so attractive; the III found that over 7 million whole life policies were purchased in 2003.

In sum, decreasing whole life insurance doesn’t exist. And really, you’re better staying away from any insurance policy with the word “decreasing” in the title.

Life Insurance for Kids

While the commercials may tug at your heartstrings, it’s important to remember that life insurance is designed to cover lost income and care for the dependents—spouse, children, aging parents, etc.—of the deceased. And typically, children don’t earn income or have dependents.

Financial planning experts recommend properly insuring the parents with life and disability insurance and investing money in Junior’s college fund instead.

How Much to Buy: Three Times Your Income?

Many people operate under the assumption that buying a life insurance policy worth three times more than their annual income is enough to protect their loved ones after they’re gone. That’s not always a safe assumption to make.

According to the Life and Health Foundation of America, you can withdraw about five percent from life insurance proceeds before you have to touch the principal. So if you make $50,000 per year and buy three times the amount of life insurance—$150,000—at five percent, your beneficiaries would only be able to withdraw $7,500 per year. That’s not much to pay the mortgage, car payments and other financial necessities.

To keep from underestimating your life insurance needs, it’s best to work with a licensed professional who can help you identify the best policy for you. Online life insurance calculators can also help you gauge your family’s needs.

Learning the Facts

When it comes to protecting your loved ones, getting the facts about life insurance can make all the difference in the world. Doing a little research will also make it easy to compare life insurance policies and quotes—so you can get on with more important things.

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