17 Life Insurance Myths That People Still Think Are True

Myth #1: Beneficiaries Get Money Based on the Cash Value of a Life Insurance Policy

Do you leave more to loved ones if you don’t touch the cash balance?

While actively making premium payments, a permanent life insurance policy grows a cash value. This cash value is separate from the death benefit that is paid out to loved ones. Let’s say the death benefit is $100,000 and you’ve accrued a $150,000 cash value, your beneficiary will get less of that death benefit if you withdraw more than the cost basis, which is how much you’ve paid into the account in monthly premiums.

If you withdraw money until you reach the cost basis, the policy will stop paying its own premiums with the cash savings. Premiums will be more expensive because life insurance increases as you age. You will risk losing the policy, including the death benefit, if you are unable to pay the rising monthly cost.

Myth #2: You Can’t Get Cash for a Term-life Insurance Policy

Can I get money for a term-life policy I no longer need now that my kids are grown?

The question is whether or not you want to renew your term life insurance policy to leave money behind for funeral services and more. When you stop making premium payments, you forfeit that money for your beneficiaries, and they will be left to pay for final expenses if you don’t have that coverage.

There is no cash value with a term life insurance policy. There’s only a benefit amount and you cannot withdraw from the account. Your only way of accessing cash for a term-life policy is by selling it to a life settlement provider.

Myth #3: Life Insurance Is for Rich People

Isn’t life insurance for the wealthy?

It’s true that most Americans do not have a life insurance policy but it’s not because life insurance is designed for rich people.

Anyone who would leave behind people dependent on their income should have a life insurance policy. Whether it’s to pay off a mortgage or pay for college, helping beneficiaries with a death benefit is what every life insurance policy serves to do.

There are life insurance policies that have a cash component, so you can access tax-free money if there’s ever a need for a loan. For people who are finance savvy and want to do some investing, there are higher-yield life insurance policies for those risk-takers too.

Myth #4: I Won’t Qualify for Life Insurance Due to Poor Health

Can I buy life insurance if I’m in poor health?

For every individual there is an affordable life insurance option. There are even life insurance policies that don’t require a medical exam, only a questionnaire about your health history. They cost more than conventional life insurance policies but it may make financial sense to buy one to take care of a surviving family.

Myth #5: People Without Children Don’t Need Life Insurance

Why should I buy life insurance if I have no kids?

If you have no work-sponsored life insurance plan, your loved ones won’t have a death benefit to help them plan your funeral services.  Also, you may be leaving behind a debt that leaves others responsible. The average cost of a funeral is over $8,000 so a burial insurance policy that covers anywhere from $5,000 to $50,000 would be a thoughtful way to help tie up loose ends.

For business owners, who want to leave behind a legacy, they can leave their organization as the beneficiary. The same is true for individuals interested in paying out the policy to a charity upon passing.

Myth #6: Work-sponsored Life Insurance Is Enough

I don’t need life insurance if I have life insurance through my job, right?

What if you lose that job? Also, did you know that most work-sponsored group life insurance policies only cover a set percentage of the deceased person’s salary? Low limits may not be enough to allow your dependents to live comfortably without your income. If there is a mortgage left or a college tuition to pay, a group life insurance policy will definitely not be enough. Supplemental life insurance is advised.

Myth #7: Homemakers Don’t Need Life Insurance

Do I need life insurance if I don’t work?

Think about all a homemaker does for the family. If someone had to be hired to take on those tasks, it would cost money. Even homemakers need a life insurance policy, to help fill the gap left in running family affairs after your passing. Also, burial and funeral costs are expensive.

Myth #8: Life Insurance Is for Older People

Am I Too Young for Life Insurance?

People buy permanent life insurance for their babies because it’s cheap and can later be cashed in to pay for college. You’re never too young for life insurance.

In fact it’s ideal to buy life insurance when you’re younger and healthier, because it’s cheaper, and also later, to cover the years during which others depend on you the most and while you have a mortgage.

You may wish you had life insurance when you’re older and can still purchase a policy, but a life policy is primarily designed to help families cope without your paycheck in a significant way. Even after kids are grown, a life insurance policy will help pay for a burial and funeral. It is also a parting gift to those you love, who may need it to start a business or to save for retirement.

Myth #9: Older People Can’t Buy Life Insurance

I’m old – Will I get rejected for life insurance?

It’s more expensive to buy life insurance when you’re older but you can do it. The policies that require a physical exam may become a challenge as you get older. However, for every situation, there is a policy that fits. For instance, you can buy a guaranteed life insurance policy by only answering a questionnaire instead of getting a full physical exam. It will cost more than a traditional policy but it may be worth it, if you decide later in life that you want to leave something behind.

Myth #10: I Only Need Two Years Salary Worth of Life Insurance Coverage

How much life insurance do I need?

The truth is there is no one reliable formula because every person’s situation is different. It’s a good idea to sit down and consider all expenses tied to the family, like a mortgage and health insurance. See how much of that will need funding if you were to pass. Consider how long your loved ones will need supplemental income. Also, ask yourself about college tuition, business start ups and anything else your loved ones may need help with.

Myth #11: You Can’t Buy Life Insurance on Someone’s Behalf

Can I buy life insurance for a child or my parents?

People buy permanent life insurance policies for their newborns all the time. When the baby grows up, they can cash in the life insurance policy for college or to start a business. You can also buy a life insurance policy for each of your parents. You would need their consent, and they may have to do a physical exam, depending on what type of policy you’re buying. You can name yourself as the beneficiary or one of several beneficiaries, depending on what you decide is best. The person who buys the policy makes the decision.

Myth #12: You Can’t Make Changes to a Life Insurance Policy

My needs are different now – can I make changes to my life insurance policy?

You may want to switch from a term-life policy to a permanent one or you want to switch to a policy that only offers a death benefit. In many instances, an insurance company may be able to make changes to your policy or draft a new one but in others, they won’t be able to accommodate your needs.

Switching life insurance seems like a daunting task and you may be worried about losing the savings account if you have a permanent life insurance policy. If you have a term-life policy, you may be able to simply pay a surrender fee and close it out.

With a permanent policy, you can withdraw the cash before closing it out. In most cases, the insurer will send you the accumulated cash amount once you close the account. Just make sure to buy a new one before your old one is cancelled so there are no gaps in coverage.

Myth #13. You Don’t Need Life Insurance if You Have a 401K or Savings

Life insurance vs a 401K plan is a complicated topic. In short, these are both great financial tools that may help during retirement if used correctly. Ideally, you’ll have both, and for different reasons.

The main goal of a life insurance plan is to help surviving family members who may be at a loss without your income. The cash savings in a life insurance policy also grows tax deferred. The death benefit is also tax-free for beneficiaries. You can also choose a beneficiary for a 401K savings plan and it’ll be tax-free.

While you’re alive, both a life insurance policy and 401K plan can be used to take out interest-free loans. The only difference here is that if you do not pay back the loan from your life insurance policy, and the loan amount is greater than what you’ve paid into the policy, that amount will be subtracted from the death benefit. You’ll also risk losing the coverage altogether if the cash balance is no longer enough to cover premiums and you can’t afford the monthly premiums.

With a 401K plan, if you don’t pay back the loan, you just have a smaller savings without risking the remaining balance. Also, contributions to your 401K are tax-deferred, which means you pay less taxes on your income if you roll some of it pre-tax into a 401K. If your employer doesn’t offer a plan, or you have your own business, you can buy a 401K plan from a bank but the cost may or may not be worth it, depending on your income and how much you’re saving in taxes.

Myth #14: You Don’t Need Life Insurance Once Your Children Are Grown

If my kids are independent, why would I buy life insurance?

It’s nice to leave a nest egg for grown children and help a surviving spouse balance their expenses. Survivors often get reduced social security survivor benefits, if the partner passes away before retirement age. Also, burial costs are expensive, so at the very least a burial policy is a must-have. If you want to leave a legacy for a business or give part of the death benefit to a charity, you can do that too.

Myth #15: You Can’t Renew a Term-Life Policy

When my term-life insurance policy expires, it’s not renewable right?

You can renew a term-life insurance policy, just at a higher price. Some policies are even convertible, so you may be able to convert it to a permanent policy, which will never expire. It may cost more, but so will renewing your term-life policy, which increases in cost by age.

One advantage of a permanent policy is that there is a cash value you can tap for a loan or cash withdrawal. Another option, if your term-life policy is not convertible, is to sell the policy before it expires to a life insurance settlement provider for cash and buy whichever type of policy you decide fits your financial goals.

Myth #16: You Can’t Change a Term Life Insurance Policy into a Permanent Policy

Can you convert one type of insurance policy into another?

Some insurance companies will allow you to convert a term life insurance policy into a permanent insurance policy, but you may see higher premiums until the policy accumulates enough cash to pay the premiums itself.

If you no longer want your permanent insurance policy and want to only have a final expenses life insurance policy, your insurer may accommodate that by paying you the accumulated cash amount and writing a term life insurance policy.

You don’t have to stay with the same insurer if you don’t want to. You can always surrender a policy and compare life insurance rates to see if you can buy more coverage for less money.

Myth #17: Life Insurance Is Too Complicated for Me To Buy

If you can’t make heads or tails of life insurance, is it best not to buy it?

It only takes a few minutes to read some informative articles and to learn about all the options. Just go in with a rough idea of how much you’d like to leave to your beneficiary or beneficiaries and what you can afford each month. Ask yourself if you see needing an interest-free loan in the future. Do you feel comfortable with a higher risk and higher return policy or do you want something that’s not risky at all? These questions will help you decide if you 1-need a term-life insurance policy or 2-a permanent life insurance policy. There are various types of permanent life policies, and they have cash value. Some have investment options too. You can also team up with a trustworthy insurance agent who can guide you by providing a few answers to some questions. Start shopping for life insurance for free, by sharing your zip code.