5 Common Misconceptions About Life Insurance

by Jason on January 26, 2010

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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