Page 144 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 8: Life Insurance

Notes
Myth #5: I Absolutely MUST Have Life Insurance at Any Cost
In many cases, this is probably true. However, people with sizable assets and no debt or
dependents may be better off self-insuring. If you have medical and funeral costs covered,
then life insurance coverage may be optional.

Myth #6: I Should ALWAYS Buy Term and Invest the Difference
Not necessarily. There are distinct differences between term and permanent life insurance,
and the cost of term life coverage can become prohibitively high in later years. Therefore,
those who know for certain that they must be covered at death should consider permanent
coverage. The total premium outlay for a more expensive permanent policy may be less
than the on-going premiums that could last for years longer with a less expensive term
policy.

There is also the risk of non-insurability to consider, which could be disastrous for those
who may have estate tax issues and need life insurance to pay them. But this risk can be
avoided with permanent coverage, which becomes paid up after a certain amount of
premium has been paid and then remains in force until death.
Myth #7: Variable Universal Life Policies are Always Superior to Straight Universal Life
Policies Over the Long Run
Many universal policies pay competitive interest rates, and variable universal life (VUL)
policies contain several layers of fees relating to both the insurance and securities elements
present in the policy. Therefore, if the variable subaccounts within the policy do not
perform well, then the variable policyholder may well see a lower cash value than someone
with a straight universal life policy.
Poor market performance can even generate substantial cash calls inside variable policies
that require additional premiums to be paid in order to keep the policy in force.
Myth #8: Only Breadwinners Need Life Insurance Coverage
Nonsense. The cost of replacing the services formerly provided by a deceased homemaker
can be higher than you think, and insuring against the loss of a homemaker may make
more sense than one might think, especially when it comes to cleaning and day-care costs.

Myth #9: I Should Always Purchase the Return-of-Premium (ROP) Rider on Any Term
Policy
There are usually different levels of ROP riders available for policies that offer this feature.
Many financial planners will tell you that this rider is not cost-effective and should be
avoided. Whether you include this rider will depend on your risk tolerance and other
possible investment objectives.
A cash flow analysis will reveal whether you could come out ahead by investing the
additional amount of the rider elsewhere versus including it in the policy.
Myth #10: I’m Better off Investing My Money Than Buying Life Insurance of Any Kind
Hogwash. Until you reach the breakeven point of asset accumulation, you need life coverage
of some sort (barring the exception discussed in Myth No.5.) Once you amass $1 million of
liquid assets, you can consider whether to discontinue (or at least reduce) your million-
dollar policy. But you take a big chance when you depend solely on your investments in
the early years of your life, especially if you have dependents. If you die without coverage
for them, there may be no other means of provision after the depletion of your current
assets.
Contd...

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