Insurance myths debunked by Termlite!
A myth is a story, usually of unknown origin, repeated so many times that it became a general belief accepted by the majority. At TermLite, we aim to educate Canadians on life insurance. In this article, we will debunk some common life insurance myths and misperceptions about the industry.
Without further ado, here are eight life insurance myths and facts essential to keep in mind before you purchase life insurance.
“Those scummy insurance companies always find a way to avoid paying out a policy!”
Right? Well, not so fast. As long as the conditions in the policy are met (the insured has passed away, or was diagnosed with a critical illness, etc) AND you’ve presented all information truthfully, insurance companies are legally and morally obliged to pay out your policy.
Let's go back a bit. Before purchasing life insurance, when you do ask for a quote, the advisor in financial security from the insurance company will have asked you a few questions about your health and way of life: age, smoking status, medical history, etc.. Life insurance quotes are based on the risk you represent for life insurance companies to ensure you.
After those basic questions concerning your health, you will eventually have to undergo a medical exam with traditional life insurance companies. This data helps the advisor determine the premiums to your specific profile and the level of risk you represent to cover.
Here is one of the real common misconceptions about insurance products: some applicants may think they can lie about their health conditions (current or prior), with no consequence regarding their life insurance policy. But a false declaration is considered fraud. When you sign the life insurance policy, you permit the insurer to run a medical check. In these specific cases of insurance fraud, the insurance company may refuse to pay out the policy.
According to traditional life insurance companies, life insurance is a must-have investment. Of course, this is biased advice. That’s not to say that you can’t benefit with life insurance, however.
Here is the second life insurance myth debunked:Your long term financial goals and your current level of financial security will determine if you need life insurance.
A life insurance plan might not be necessary for someone who has no family and no debt or ongoing expenses that still need to be paid after his or her death. However, most people do have family or loved ones they would like to leave a sum of money to in the event of their death.
If you have debts, you know it will cost your family a significant amount of money after your pass away. Like most people, you may have a car loan, a mortgage and/or maybe consumer debt. Even if you don’t have outstanding debt, you may have ongoing expenses that will still need to be paid for after you pass: children, education costs, care for a parent or spouse, and liquid assets to keep a business running being the most common examples.
Moreover, if you have not planned your funeral and final expenses, then life insurance makes sense for you and your loved ones to cover all your expenses, debts or otherwise.
Even if you have no debt or outstanding expenses after you pass away, you may still want to leave your loved ones with a lump sum payment, whether as inheritance or even a charitable donation to a worthy cause. Life insurance products (whole life or term life) can be a great tax-free way of leaving a financial legacy after you die.
There is no one-size-fits-all when it comes to life insurance. Rather, the ideal policy differs for everyone.
The most affordable type of life insurance policy is term life insurance. For many people, term life insurance can be ideal for their circumstances (cheaper does NOT always mean better or worse when it comes to coverage). But the cheapest solution might not always be the best for you.
Let’s quickly compare some of the types of life insurance policies and who would best benefit from them.
Generally considered the most affordable type of policy, young people tend to purchase term life insurance to save money on their coverage and invest the difference into a high-performing product or pay their mortgage faster. This kind of policy lapses after the duration of the term of the policy.
As the name suggests, unlike term life insurance, whole life does not expire. Many forms of permanent life insurance policies also have an optional investing component. Because of these factors, permanent life insurance is typically more expensive than term.
Specifically meant for homeowners with an existing mortgage, mortgage life insurance is designed to cover your mortgage repayments if you die. This type of plan’s benefit can pay off your mortgage and allow your family to keep their home if something happens to you. Mortgage life insurance is a subset of term insurance.
Though it may be tempting to buy the cheapest policy to save in the short-term, your ideal policy would depend of individual factors such as age, family situation, your income to expense/debt ratio, and the financial goals of your family. A licensed advisor will be able to give you expert, tailored advice.
This is one of the most common misconceptions, and a dangerous one. Even a homemaker may need life insurance protection for the family. Why’s that?
A homemaker often provides household services that would be expensive to pay for otherwise. Here are all the expenses of a family that you should keep in mind for your life insurance coverage.
Now let's look at the expenses you’d pay if you didn’t have someone taking care of the home:
Even though it may not be obvious, the loss of a homemaker or a spouse that may not bring substantial income to the household can have a devastating financial impact on your family.
Investing money is an excellent way to build your financial security, and investments can help you immediately as you can withdraw the money to pay for your and your family’s unexpected expenses. Assets can have an obvious benefit in terms of cash flow. But they are subjected to taxes, which implies a significantly lower amount of money for your family when they perceive it. The date your receive the money is also significant. It might take months - sometimes years - for the money before you start seeing your estate wrapped and your investments distributed.
On the other hand, life insurance protects your beneficiaries and helps your loved ones for their future. Life insurance has a benefit for you (peace of mind) and a financial benefit for your family. The death benefit of the life policy is tax-free, and is the insurance company will pay it within 30 days. And unlike an estate settlement, the insurance company will pay the death benefit without any executor's intervention. In other words, with life insurance, your loved ones get immediate liquidity for the day-to-day expenses in that interim period while the executor is winding up the estate.
Instead of choice, think in terms of complementarity.
You may also want to consider a whole life insurance policy that cumulates the advantage of a tax free financial product directly paid to your family, and the possibility to benefit from compound interest and cash value. You'll pay higher premiums, though, so better to speak with an advisor to understand if this is the best life policy setup for you.
“If we don’t ever see the money, what’s the point?”
One of the most common misconceptions about term life insurance is that people are confused concerning the final objective.
The job of term life insurance is done whether the death benefit payment has been made or not. That's the main reason why term life insurance is the cheapest plan.You protect your family's future, giving you, the insured person, and those who financially depend on you peace of mind for their financial future.
No one can predict what the future brings; in the chance you do pass away, your loved ones will be able to benefit from a financial windfall to focus less on finances and more on the memories you leave behind.
That's why term life insurance is worth it. Knowing your loved ones are safe no matter what happens is priceless.
One of the most common myths and false beliefs is concerning debts. If someone doesn’t have any family or next of kin, the debt is wiped out…right? Think again.
This is a myth. When someone passes away, all bills, taxes, amounts due remain due.
Is there a way to avoid paying their debt? Yes, if you refuse all succession. But then, you would lose all the assets you’ve accumulated and leave behind: savings, real estate property, etc.
There is a simple way to avoid the loss of estate due to hereditary debt (hint: life insurance). It’s also possible in many cases to take out a life insurance policy in someone else’s name, so long as you:
We hope this article has cleared any false beliefs and debunked some insurance myths about life insurance products. At TermLite, we believe term life insurance protection is an excellent fit for many profiles looking for life coverage. If you need life insurance, our advisor is ready to answer all your questions about our choice of term policy and additional coverage.
Written by Diane Taes