A few weeks back I tackled this annoying topic by discussing four questions you should ask before you buy life insurance.
I was honestly surprised at the popularity of that post – so I decided to tackle the annoying topic AGAIN! This time to help clear up some common misconceptions that are out there regarding life insurance.
We all have different perceptions of life insurance and we tend to think that whatever we believe must be right. Our views have been formed by the media, by friends or family or even insurance agents themselves.
But what’s often the case is that we don’t do our research into what’s true and what’s not. 
So here are some of the most common misconceptions about life insurance:
1. You Can’t Commit Suicide and Have Your Beneficiaries Collect the Proceeds
This one is partly true. The truth is that in most states you only have to have your insurance in place for two years. At that point you can commit suicide and have your beneficiaries collect the death benefit proceeds.
Some states have tried to the suicide provision clause down to one year in insurance contracts, provided that the insured did not contemplate suicide at the time of applying for the policy.
Side note: Don’t do this! 
2. The Insurance Company Will Never Know If I Fudge the Application
This one is a common one because for some reason people seem to think they can pull the wool over the insurance companies eyes.
Ahh, they’ll never know that I had that heart surgery when I was 25 – I’ll just put down that everything is fine.
Here’s the rub: Ok, so maybe you slip this one through the goalie, but don’t think you’re in the clear just yet.
The insurance company has the right to investigate the cause of your death and if they find that your cause of death at age 40 was a heart attack and upon further investigation they see you had heart issues at age 25 they could refuse to pay your beneficiaries.
Many companies will compensate something for fear of negative press, but it is their right to deny a claim. You are required to tell the truth on the application!
Side note: Tell the truth!
3. The Insurance Company Will Never Know I Smoke
Can’t kick that habit, but don’t want to pay through the nose for life insurance? Thinking about marking “No” to the question of “have you ever used tobacco in any form?”
Think again. Insurance companies take blood tests that can trace tobacco in your system up to six months after you’ve had your last puff.
Side Note: Don’t smoke or don’t pretend you don’t.
4. Buy Term and Invest the Rest
This is one I hear a lot in the media.
The basic premise is that whole life insurance or “permanent insurance” is way too expensive and you do not need to use this as an investment vehicle – after all this is insurance – therefore you should always buy term insurance and invest the difference between the two policies into an account.
It makes some sense at first, but here’s two things to consider:
- This doesn’t make sense for everyone!
- Most people don’t invest the difference!
I’m not a big fan of sweeping generalizations like this. There are some instances when using cash value life insurance makes sense (ie- someone making a ton of money who doesn’t qualify for a Roth and is looking to sock away a bunch of money into a tax-free savings vehicle)
Side Note: Make sure you know why you are buying insurance in the first place.
5. I Never Have to Review My Insurance Once I Purchase It
Is there really anything in life that we shouldn’t review? Many people seem to think that once you buy your life insurance you can check that off the list and never have to worry about it again.
It’s wrong because if you have term insurance it will eventually expire and you have to decide what you want to do (buy it again or get rid of it).
If you have permanent insurance you should be running what’s called “reprojections” on these things each year to determine the vitality of the policy and make sure it’s running at “optimal speed”.
Another thing that people often fail to review is their beneficiaries. Life happens, things change.
Your nephew Billy might’ve been the cutest little guy growing up, but now is a royal jerk. You may not want to leave the half mil to him anymore – review your benny’s to make sure the money’s going to who you want it to go to.
Side Note: Don’t put your insurance on auto pilot. You should review it at least once a year.
Other Misconceptions
Can you think of anything else that should be on the list?
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{ 14 comments… read them below or add one }
A great post. The funny thing about smoking is agents often tell people that they only need to quit for a short period of time. The truth is you can get non-smoker rates if you can quit for a couple of weeks. The problem with this is that most real smokers can’t quit for that long. Then you have misconception #2. With smoking, if you lie to the insurance company and they find out on your death, they most likely will adjust your life payout to equal the death benefit your premium would have paid for on a smoker rated policy.
.-= CJ Bowker´s last blog ..A different dofollow plugin =-.
Thanks for the comment CJ – I’ve heard of an insurance company being able to tell if you’ve had tobacco up to the last 6 months.
I agree though, that most smokers can’t quit for that long and if you die from anything related to smoking they can deny the claim. A scary chance to take for sure.
.-= Jason´s last blog ..Are You Holding a Retirement Time Bomb? =-.
Good stuff – I’ve hears the same thing about the suicide issue. I would be interested in a discussion on whole life insurance. On the whole, most of those policies, even with the tax-deferral aspect, don’t compete with your own mutual fund, would it? Seems like you’d be giving up a lot of financial flexibility just to defer paying taxes on something.
.-= Jason @ MyMoneyMinute´s last blog ..There’s An App For That: ‘Universally’ Slash Your Health Care Costs =-.
Hey Jason, it’s not for everyone for sure. You have to make sure you’re putting in a good amount to make it work and you also have to remember that first and foremost it’s insurance. That’s the main reason you should be buying it.
Great post. CJ’s right. Even if you could fool the life insurance company when you apply, you might not be able to fool them when you’re dead.
I’ve always been tempted to clarify the truth about the suicide clause on my own site. There are a lot of searches on this topic, but I think the public is better suited not knowing the truth. They are either contemplating suicide and confusion will help delay such action, so they can get help. Or they recently had a loved one kill themselves and the issue will be obvious shortly to them.
The other thing is that I do something with life insurance (hint: I don’t sell it), and even I think most people who could theoretically use it as an investment vehicle shouldn’t. There are risks with a life insurance policy that other investors simply aren’t exposed to.
@Jason
The key to using whole life insurance the right way is understanding the structure of the policy. The most important piece is the funding of the policy. This is where most people really screw things up and why you hear all the negative things about it.
I would definitely argue that a properly structured (including funding) whole life insurance policy would create a ton of options and flexibility in anyone’s financial world. However, properly structured would mean different things in any and every situation.
In regards to the post, the biggest mistakes I see people making are number 5. People want life insurance to be set it and forget it and it’s not. Every 2-3 years an audit should be performed on your life insurance policies. http://evolutionofwealth.com/2009/09/life-insurance-audit/
.-= Evolution Of Wealth´s last blog ..Search for Instant Gratification =-.
Are you trying to say that honesty is the best policy?
Sound like a good rule of life for me.
Thanks for an informative post.
.-= Craig Ford´s last blog ..The Rich and Poor: My Interview With The Poor People of PNG =-.
I sold insurance for a short time many years back, and though whole life policies MAY be the best plans for some people, agents will try to steer customers into it because the premiums and commissions are higher. In fact, the commissions are disproportionately higher.
Any review of insurance coverage is best conducted by someone who isn’t also selling insurance. A financial planner, attorney or accountant would be more objective.
lt’s hard to get the right anything when a commission hangs in the balance.
.-= Kevin@OutOfYourRut´s last blog ..Buying vs Renting a Home – Its Not All About Money =-.
@Kevin
Why do you say they are disproportionally higher? Commission rates for term life insurance usually run between 75-120% of premium. For Universal Life policies they run between 50-90% of target premium. For Whole Life policies usually between 30-70% of premium. Proportionally I would argue that they are the lowest. A well designed policy will usually only run commission rates at around 30-35%. That is why most agents don’t design the policies for the best interest of the clients.
.-= Evolution Of Wealth´s last blog ..7 Ways Your Group Disability Will Fail =-.
Very good stuff. I especially like #2 and #3. As an agent, I tell people this all the time: “Don’t lie on your application!”. Just don’t do it. Insurance companies are in the business of sussing out risk. Chances are that if you lie on an application, the insurance company will know. And if they don’t find out at the time of application, you can bet that they will want to know if you lied when it comes time to pay that death claim.
As for number 3 on the list, well, just quit smoking! It’s bad for you!
I actually enjoy this blog. Discovered it on Google and you put up some great info. Look forward to the next post.
This is such a well-written and informative post. Perhaps your readers could use this one
I am already sick and overweight, I can’t do anything about bringing down premiums
While you can’t lose weight in a week, even a month, and can’t get rid of your illnesses in the same amount of time, you CAN do SOMETHING as a last-ditch effort at getting the best premiums possible given your health condition.
Most people don’t know that there are definite ways to prepare for a life insurance medical exam. By properly preparing for a life insurance medical exam using these tips, you can avoid abnormal results which could adversely affect your life insurance rate.
Denise
Denise, that sounds like a guest post waiting to happen!
How To Prepare for an Insurance Medical Exam…
Life Assurance Ireland provides a lump sum payout to your family should you die during the term of the policy. thanks for sharing this policy with us.