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Myth-Defying Insurance - Separating myth from reality is the first step in finding a life insurance solution that fits you just right.
By Jack Gordon
Illustrations by Carl Wiens
 You know how a one-size-fits-all T-shirt never really fits all? It’s the same with insurance. What’s good for one is rarely good for all—despite what some would have you believe.
Still, we often fall prey to generalizations or commonly held myths like this when it comes to buying life insurance. These kinds of oversimplifications can easily steer you in the wrong direction, but if you’re armed with the right guidance and a bit of “myth-detection” know-how, you can make good long-term choices for you and your family.
Frequently Asked Questions
Life insurance has become a far more important strategic financial tool than many realize. On one level, it’s about protecting your family, because even though the odds say you will live to a ripe old age, you’re a person, not a demographic. And despite your dreams, desires and plans, you need to address difficult questions like: What happens to your family if you should die next week or next year? Do you have enough life insurance? Is it the right type of policy? Beyond that, life insurance also can be used as a vehicle to meet financial goals that apply while you’re still alive. Do you have what you need to foster your dreams?
Those are not simple questions, and the first thing a Thrivent Financial for Lutherans representative will tell you is to beware of simple, all-purpose answers. You may hear any number of myths about life insurance. Some popular ones: The right amount for a death benefit is five to 10 times your annual income. Your need for life insurance will disappear when your mortgage is paid off or when your kids are grown. Don’t use an insurance policy as a vehicle to accumulate capital. Only the death benefit matters, so term insurance makes the most sense.
The trouble with such blanket statements is not that they’re never true but that they’re true only for some people, sometimes, says Bruce Fear, vice president of protection products and solutions for Thrivent Financial. Life insurance myths are “nothing more than vast generalizations,” Fear says. “They have no place in solving individual problems.”
Term vs. Permanent
Take the idea that only term insurance makes sense. “People are told that a lot,” says Todd Yeiter, director of insurance product marketing for Thrivent Financial. The idea is that permanent policies, which build cash value (whole life, universal life or variable universal life), are too expensive in relation to their performance. Therefore, the best strategy, supposedly, is to buy term insurance, which offers lower premium payments, and invest the difference in other vehicles that may offer higher rates of return.
“In theory, that makes sense, and it can work,” Yeiter says. “But in reality, people usually spend that difference instead of investing it.” The question, in other words, is not whether somebody could execute the strategy of investing the savings but whether you would execute it. And that’s not even taking into account other complicating factors such as the tax advantages pertaining to the cash value in insurance policies.
One-Size-Fits-All
Any time you hear “always do this” or “never do that” with regard to life insurance, you’re listening to bad advice, says Fear. The only intelligent decisions you can make are those based on your family, your financial situation, your discipline, and, above all, your goals. A good insurance agent is one who asks a lot of questions before making recommendations about the types and amount of coverage you might require. Think twice about any agent who has the answers before the questions have been asked.
That said, to the extent that your situation is typical, there are certain principles that can help you cut through the fog of questions surrounding life insurance. For instance, the earlier you buy some types of coverage, the better. Premiums are lower in your 20s and 30s than they will be in your 50s. And, you can’t count on remaining healthy any more than you can count on living to be 100, so it is important to lock in some kind of coverage while you qualify on health grounds.
Basic Needs Only
From your 20s through your 40s, the primary purpose you seek to achieve with life insurance most likely is to protect your family by covering your debt or replacing your income in the event of your death. If that’s the case, Thrivent Financial representatives caution, don’t get hung up on the complexities of various types of policies. The first question to deal with is the amount of insurance you need, not the type. This obviously depends on many factors: the number and ages of your children, whether your spouse is employed, the lifestyle you wish to provide them, and so on.
Many people view life insurance “mainly as a way to pay off debt,” says Marlin Pruismann, a Thrivent Financial representative in Blairsburg, Iowa. This is understandable, he says, given funeral expenses, not to mention the lingering mortgage on the house. “But I stress that the main objective usually should be to replace lost income,” he says. “With the right income, the surviving spouse can handle reasonable debt.”
In Pruissman’s experience, most people underestimate the resources it would take to replace their income. Suppose the death benefit on a policy is $500,000. If the surviving spouse invests that and earns interest at 5 percent, the annual income generated is only $25,000. Want to pay off a $100,000 mortgage as well? Now the death benefit required is $600,000. Want to provide a higher income? It would take $2 million at 5 percent to generate $100,000 a year. This is why amount is more important than type, and why term insurance can be the best buy, especially for younger couples and families.
“Most of the insurance I place is permanent,” says Kevin Ruebesam, a financial representative for Thrivent Financial in Longmont, Colorado. “But I don’t want to sell a $100,000 universal life policy to someone who needs $750,000 in protection.” If that’s the case, and you can only afford a term policy to get the protection you need, then choose the term policy, he says.
Clearly, as this example illustrates, it’s important to study the bigger picture. A patented, one-size-fits-all approach could leave you at risk for insufficient coverage. When it comes to the amount and type of insurance you need, generalizations just get in the way. The only right answers are the ones right for you. Life insurance can be a key ingredient in realizing your dreams, protecting your family and laying the foundation for your ongoing legacy.
Jack Gordon is a writer and editor in Eden Prairie, Minnesota.
Act Now
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