Insurance is about managing risk. Insurance companies use sophisticated algorithms to determine how
risky each of us is, and they price policies accordingly. That's why smokers pay
more for health insurance and bad drivers pay more for car insurance.
Still, insurance can be confusing
and aggressive sales agents only make the problem worse. To help clear things
up, we're debunking some of the most pervasive myths about different types of
insurance.
Myth: Everybody needs life insurance.
If you have dependents or shared debts with anyone else, then you
absolutely need to have life insurance. But if you're single with no
outstanding debt, life insurance is optional. The only benefit of having it is
to cover the cost of medical or funeral expenses that may come up. But if you
have sufficient assets to cover those costs, than life insurance isn't
necessary.
When the beneficiary receives the death benefit from a life insurance policy, the money is free from income tax. The money that is accumulating in the cash value account is also tax free. If you decide to borrow against your policy by receiving a policy loan, the money will not be subject to taxation. However, your policy proceeds can bump your estate value above the federal threshold and trigger a tremendous federal tax hit--as much as 55 percent. The easiest way to avoid estate taxes on your policy is to assign it to another owner, such as the beneficiary, who isn't named to your estate. As long as it is outside your estate at the time of your death, the policy is safe.
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