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Life Insurance: Providing Security for Your Survivors

Myths and Misconceptions about Life Insurance

Myth #1: "Cash-value insurance is always best."—There are two basic types of life insurance: Term and cash-value. Term is relatively inexpensive when you're young, but does get progressively more expensive as you age. The premium you pay buys you pure insurance coverage for a specific time period (or term). Cash-value or permanent insurance has a savings component. While the premiums are higher, a portion of your payment builds a savings fund which you could use for emergencies and opportunities, like funding your children's education.

In deciding which type of insurance to purchase, you must analyze whether your personal circumstances are such that buying term insurance at a lower cost and investing the difference in a mutual fund or an IRA is the best choice; or perhaps buying a "one-stop" cash-value policy is a better choice in your case. The most important element in your decision is that you purchase the right amount of coverage; that should always be your primary focus in insurance shopping.

Myth #2: "With a cash-value policy, I have to pay premiums only for a few years."—You may have seen a policy illustration where your out-of-pocket premium payments disappear after a few years. It is important to note that the conditions presented depend on the insurance company's dividend scale or interest assumptions, which are not guaranteed. If the insurance company decreases dividends or lowers interest rates in future years, policyholders may be surprised to find out they'll have to continue paying premiums beyond the quick pay illustration.

IMPORTANT NOTE: If you have a cash-value policy and plan on borrowing from it, the insurance company may pay you a lower dividend if you take a loan against your cash value. Discuss with your agent how future borrowing may impact the policy.

Myth #3 "I have enough insurance at work."—Don't count on it. Most companies provide you with a face amount equal to only one times your salary, although they may offer you the option to purchase additional coverage. Determine how much more insurance you need, and then compare your employer's rates with the rates offered by a private insurer or association before you purchase more.

Myth #4: "I don't need life insurance because my children will get Social Security Survivor benefits when I die."—They will get survivor benefits, as long as your child is under age 18, or age 19 and is still in high school (under age 22 if disabled). However, the benefit amount may not be adequate to support them or to fund a college education.

Myth #5: "My family can move if I die."—Uprooting a family to a smaller residence or a less expensive area doesn't necessarily mean they'll require any less space or have smaller needs.

Myth #6: "My family won't need much money when I die."—This won't be true, unless you've made provisions to have the mortgage paid off, the utilities paid every month, food delivered free to their doorstep and one-size-fits-all clothing that will last until your children are fully grown and out of the house. You should expect your survivors will have an income need of at least 60% of the household income before you died.

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