You know you need life insurance. You need it to protect your loved ones, yes. You might also think of it as a way to help build generational wealth. But shopping for it can be hard, and there’s so much misinformation out there.
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Financial expert Suze Orman knows that parsing through all the information online can be difficult. That’s why she’s devoted time, energy and passion to dispelling some of the common myths around life insurance. Some of her takes may be controversial, but they definitely challenge some of the prevailing myths around life insurance — and could help you make better decisions.
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Myth 1: Life Insurance Is Only Relevant if You’re Older
This is one of Orman’s biggest bugaboos when it comes to how people think about life insurance. She wants people to understand that life insurance is actually critical for people who are in their younger years — especially those with dependents or financial obligations. It ensures that the people who rely on you financially would be taken care of if something happened to you before you had the chance to build up your assets or pay off your home.
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Myth 2: $100,000 in Life Insurance Should Cover Me
Sure, $100,000 seems like a lot of money, especially when you see it in a policy. It’s easy to assume that it would be enough to cover your loved ones. But Orman urges you to dig deeper and do the math.
“You need to figure out that if you have $50,000 a year of income, and that income supports a family, and something happens to you, $100,000 of life insurance will only get them by for two years,” she said. “That may not be long enough.”
Ideally, you want enough life insurance so that the death benefit, if invested wisely, can generate the equivalent of your annual income — year after year.
Myth 3: All Kinds of Life Insurance Are Created Equal
Many people assume that life insurance is just, well, life insurance. A catch-all term for one-size-fits-all coverage. But that’s far from the truth. There are several different types of life insurance, each with its own structure, costs and benefits.
Two of the most popular types are whole life insurance and term life insurance. Whole life insurance typically covers you until age 100 or 120 and includes a cash value component that grows at a guaranteed rate. However, it’s usually far more expensive than term life insurance.
Term life insurance, on the other hand, provides coverage for a set period, or term — usually 10, 20 or 30 years. It doesn’t build cash value, and you can’t borrow against it. However, it is generally the least expensive form of life insurance and is ideal for covering specific financial responsibilities, such as a mortgage or your kids’ education, during key phases of life.
Orman is a strong advocate for term life insurance because it provides essential coverage at a lower cost.
“Unless you have someone in your family with special needs, there is typically no need to buy whole life, or universal life, which are referred to as “permanent” policies and cost a lot more,” she wrote on her website.
Myth 4: The Insurance You Get From Work Is Enough
Think you’re all set because you have life insurance through your job? Think again.
“The life insurance you get at work as a no-cost benefit is not going to protect your loved ones,” Orman wrote. “Workplace life insurance pays out a very small death benefit that is typically equal to one or maybe two years of your salary.”
That amount might help with immediate expenses, but it won’t provide long-term financial security for your family. That’s why Orman recommends getting your own term life policy — one that covers at least 20 times your annual income. (25 times is even better.) That way, no matter what happens, your family’s financial foundation stays solid, and you’ve taken a smart step in securing their future.
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Sources:
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Suze Orman, “Understanding Life Insurance: What You Need to Know“
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Suze Orman, “Life Insurance Coverage Is Necessary“
This article originally appeared on GOBankingRates.com: Suze Orman Debunks 4 Common Life Insurance Myths
