A column on personal finance prepared by the Virginia Society of Certified Public Accountants


(May 27, 2003) – When it comes to life insurance, there are plenty of common misconceptions that can result in inadequate coverage and unnecessary financial hardship for families who suffer the loss of a loved one. The Virginia Society of CPAs dispels some of these myths and offers advice on the best way to protect your family.

Myth #1: Everyone Needs Life Insurance

The primary reason for purchasing life insurance is to protect those who are dependent on your income. If you’re young and single, with no children and no aging parents, chances are, you don’t need life insurance. Understandably, some single people want life insurance for covering funeral expenses, paying off accumulated debt, or making bequests to charities or special individuals. However, this is the exception rather than the rule.

Myth #2: Only the Family Breadwinner Needs Life Insurance

Although the stay-at-home parent may not contribute cash income to the family, he or she provides important services, such as caring for the children and keeping up the home, which would be costly to replace. To calculate the life insurance needs of a stay-at-home parent, determine how much it would cost each year to pay someone to provide those same services for as long as your family would need them.

Myth #3: The Amount of Life Insurance You Need Is Equal to Seven Times Your Salary

Life insurance needs vary from individual to individual and can even vary throughout your lifetime. The better answer to how much life insurance you should carry is not a standard amount, but rather, “It depends.” Determining the right amount takes homework. You need to inventory all your other financial resources and think long and hard about how much it would take for your family to maintain its lifestyle without you. Families with young children typically need more life insurance than a couple close to retirement. Similarly, if your assets are tied up in real estate or in a family business that would have to be sold for your family to financially survive, you may need more insurance than a family with significant liquid assets.

Myth #4: Permanent Life Insurance Costs More So It Must Be Better

Don’t make judgments about life insurance based on cost. For people looking strictly for income replacement, term insurance typically is the better choice. Term life insurance is “pure” insurance with no investment component. You buy term insurance for the duration of time you will need coverage. Your premiums typically go up each year unless you opt for a level premium term policy. The premiums for this type of policy are higher but remain constant for the term of the policy.

While the primary reason for any life insurance purchase should be income protection for your family, permanent insurance policies, including whole life, universal life, or variable life provide long-term, investment-like features that some people find appealing. For example, with these policies you can build a cash accumulation value from which you can withdraw during your lifetime, though doing so may affect your death benefit and have tax consequences. If you’re looking for pure return on capital, other investments usually provide better results. Keep in mind, too, that the premiums on these policies are higher than on term insurance policies.

Myth #5: Term Insurance Policies Are Renewable

While term policies may be renewable, you can expect to pay more, perhaps considerably more, when you renew. If you took out a 15-year level premium term insurance policy and, at the end of the term, decide to renew it for another 10 years, your premium would be significantly higher because term insurance premiums increase with age. And, if you have developed serious health problems since you first applied for the policy, you may find the cost of renewing your policy to be prohibitively expensive. A better strategy might be to take out level premium term insurance for a longer period than you expect to need it. You can always shorten the term and let the policy lapse by simply not paying the premiums.

Myth #6: Life Insurance Is Expensive

How much you pay for life insurance will depend on a number of risk factors, including your health, your age, your family’s medical history, and the type and amount of insurance you are looking to purchase. Generally speaking, you’re likely to find that the cost of term life insurance policies for a person in good health is reasonable.

A CPA familiar with your overall financial situation can provide you with useful advice concerning what type and how much life insurance to buy. With that information, you can shop for good rates. Although life insurance products are becoming more commodity-like and insurance companies are continuing to lower premiums to remain competitive, there are still price variables.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at

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