Cost & Coverage
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Before you start paying your premiums, you should fully understand the ins and outs of your life insurance policy. Here are the life insurance myths we see the most, debunked.
Even if you don’t have dependents, you may need a life insurance policy to protect loved ones from outstanding debts
If your health has improved, you can ask your life insurance company for better premiums through a process called reconsideration, but your insurer cannot increase your premiums if your health has worsened
Term life policies are five to 15 times cheaper than whole life insurance policies, which are usually too expensive for people to maintain
The intricate nature of life insurance can make it hard to find the correct information. But when you’re setting up a financial security blanket for your loved ones, it’s important that you’re getting the right answers to any life insurance questions you may have.
At Policygenius, we hear a lot of common myths about life insurance and how it works. We're here to debunk them so that you're only getting the most accurate information about your life insurance policy.
Term life insurance is not an asset and should not be regarded as an investment. Life insurance is simply a form of financial protection that pays your loved ones a lump sum when you die.
Whole life insurance policies, on the other hand, come with a cash value that can be used as an investment component, but it’s generally only recommended for high-net-worth individuals who have maxed out all other investment vehicles. About 45% of whole policies lapse within the first 10 years of being in force because they are too costly to maintain and you can generally get better returns on traditional investments.
Most people will see a higher rate of return by purchasing a term life insurance policy and investing the difference.
If you’re the beneficiary of a life insurance policy and the policyholder dies, you don’t automatically receive the death benefit payout. To get the funds, you have to file a death benefit claim with the life insurance company.
The claims process varies from company to company, but usually involves a claims form and a phone call to the life insurance company. After that — pending there is no further investigation — you can receive the death benefit in as little as five days to as long as 45 days.
Just because you applied for life insurance and initially got high premiums doesn’t always mean that you’re stuck with them for the entirety of the policy. While a life insurance company can’t come back and increase the cost of your premiums if your health worsens, you can potentially get better rates if your health changes for the better.
To get a better health classification, and thus better life insurance premiums, you can apply for something called reconsideration with your insurer. During reconsideration, you go through the underwriting process again so the life insurance company can determine if your health has truly changed and if you’re eligible for a lower rate.
After you go through the reconsideration process, the life insurance company can decide that your health hasn’t improved enough to give you better premiums, but they can’t decide to lower your health classification or charge you more for your policy.
Your life insurance premiums are based on your age and what your health looked like during the underwriting process. As you age and your health changes, your policy will continue to reflect how you were initially underwritten.
If you get an illness that would have initially made you ineligible for life insurance or you take on a risky hobby that would have led to high premiums, the life insurance company can’t come back and change your policy. Your rates remain the same as long as you continue to pay your policy premiums.
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Term life insurance policies come with no policy supplements, unlike whole life insurance which can include a cash value investment component. This bare-bones type of life insurance makes it an affordable coverage option — anywhere from five to 15 times cheaper than whole life insurance policies.
The chart below demonstrates the pricing disparity between a term and whole life insurance policy:
|AGE||TERM ($250,000)||WHOLE ($100,000)|
Methodology: Sample monthly premium rates based on 20-year term life insurance policy for a non-smoker male in Preferred health rating; quotes based on policies offered by Policygenius in 2020.
The affordability of term life insurance make it the best life insurance option for most people. The high cost of whole life insurance is only recommended for people with particular circumstances, such as a high-net-worth or lifelong dependents.
To find a policy at the most competitive rate for your individual circumstance, you should compare policies at different life insurance companies. Every company treats each individual circumstance differently and shopping around can help you find a life insurance company that offers you the best premiums.
Alongside health, vision, and dental insurance, many employers offer life insurance benefits in the form of group life insurance. Group life policies are easier to qualify for than traditional life insurance because they are guaranteed issue, which means there are minimal hurdles to overcome to get coverage.
The catch is that group life insurance generally doesn’t provide the amount of coverage that most people need. Optimal coverage is at least 10 to 12 times your income, but according to the Bureau of Labor Statistics (BLS) the median maximum coverage amount offered by employers is only $250,000. If you make $75,000 a year, you want at least a $750,000 policy — only opting for an employer-sponsored policy would leave you severely underinsured.
And if you leave your job, you lose your policy and incur a coverage gap. The application process for a new life insurance policy can take 4 to 6 weeks — or longer if the insurer requires additional information — and if you die in that time, your beneficiaries won’t receive a life insurance payout.
Even if you’re in your 20’s, single, and don’t have kids, it still might be a good idea to get life insurance.
If you share bills and everyday expenses with a partner or owe student loans, you probably need some coverage to replace your financial obligations. If you die, your spouse or any family members left behind may be liable for paying off those expenses and debts. Life insurance functions as debt relief, and having the proper coverage in place ensures that your costs and expenses don’t become a loved one’s debt.
Getting life insurance while you’re young can also help you plan for the future. For example, if you intend to have children later on in life, you’ll eventually want a life insurance policy to ensure their financial protection. Purchasing a life insurance policy while you are young and in good health can lock in affordable premiums — as you age and your health evolves, buying life insurance gets more expensive.
Life insurance is meant to provide financial protection to your dependents after you pass away, so it’s reasonable to assume that if you don’t have children, you don’t need a policy.
What you might not realize, however, is that a life insurance policy can provide financial protection for more than just your children. Life insurance coverage ensures that if you die and have any outstanding debts, such as a mortgage or student loans, your loved ones aren’t left shouldering the costs or losing an estate they might rely on to a probate court.
Additionally, if you split bills or everyday expenses with a significant other, a life insurance policy can replace your financial contribution. Coverage can be used to protect family members or a business partner who would suffer financially if you died, not just your children.
Because life insurance is technically income replacement, many people think they don’t need to buy a policy if they are a stay-at-home caregiver.
The value of a stay-at-home caregiver goes beyond income, however, and their economic contribution to the household averages to about $162,581 a year. If you take care of household duties, children, or elderly parents and you die, your partner would likely need to pay someone to perform that labor. Putting a policy in place, even if you don’t earn an income, is still a good idea to ensure your loved ones are protected when you’re no longer around to care for them.
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