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People come in all shapes and sizes.  We are all different and unique, from our nationality and religious background to our individual opinions and sense of humor.  But we all have one thing in common:

At some point, everyone’s time on this Earth will expire. 

Everybody dies.  And your death is an event that you need to consider as a part of your financial plan.  When analyzing your options to determine how much, and what type, of life insurance is a good fit for you and your family, be wary of these 3 common misconceptions:

1. Life Insurance is a good investment.

Life insurance salespeople will often sing the praises of Cash Value Life Insurance.  Building cash value inside your life insurance policy certainly has its advantages – there is tax free income, no tax reporting, death benefits to beneficiaries, etc.  However, you must understand the underlying costs and limitations of the insurance and what that means for this “investment” in the long run.

Essentially, when you purchase fixed life insurance as an investment, the costs are high and the returns are low.  That doesn’t quite sound like an ideal investment.  So why do people still overfund life insurance policies to build cash if this is the case?  Well, if you are in an extremely high tax bracket, you may be willing to accept a lower tax-free return because the equivalent taxable return is higher.

When you purchase variable life insurance, the returns can be higher (and so are the costs), but now you are invested in securities that can fluctuate in value.  And if the underlying investment performance is less than what was illustrated, you could be stuck having to pay a higher premium to keep your coverage intact.  Can’t afford the higher premium?  Then you may have to let the policy lapse and now you’ve lost your life insurance, and all the savings that was supposed to build up inside it.  That doesn’t sound like a good plan, does it?

Cash Value Life Insurance can be a great fit for some, but is generally oversold and not a good investment.

2. It is always smart to buy term insurance and invest the difference.

Many financial professionals recommend that you buy term insurance and invest the difference.  Term insurance is the cheapest form of insurance you can buy, so it makes sense that if you spend less on insurance, you have more money to save and invest.  And if you are saving more, you will outlive the need for insurance if you outlive the term.It is always smart to buy term insurance and invest the difference.

Wow, what a nice theory.  The truth is, however, that most people won’t actually save in such a disciplined manner.  And even if they do, what if something goes wrong?  Poor investment performance, unexpected expenses, and litigation are just a few examples of how you could find yourself with no life insurance and insufficient savings.  And now for the kicker – What if your health has deteriorated and you are no longer insurable once your term insurance expires?

When does buying term and investing the difference really work?  When you have an insurance need that will expire when the insurance does.  For example, you have a mortgage that would burden your spouse if you died before it was paid off, or young children that would require costly care if you died before they reach adulthood.

3. Your group life insurance through your employer is sufficient.

The problem with your employer’s group life insurance is pretty self-explanatory – It is your employer’s group life insurance.  If you stop working there, you lose your life insurance.  Furthermore, if you are young and in excellent health, it is likely that you’d benefit from securing your own coverage outside of work.  Why?  Because group life insurance incorporates the whole group – the young, the old, the sick, and the healthy.  If you are one of the youngest and healthiest in the group, you are paying more for your insurance so that others may pay less.

Remember that life insurance, in its purest form, is not an investment.  Just because it is not an investment, however, does not mean that your money is wasted.  In fact, every month that we have the privilege of paying a premium should be considered a blessing, because it is another month that we have not used our insurance, and another month we have been given with those we love.

Alison Bach, CFP®

Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors are not affiliated.  2009 Market Street, Camp Hill, PA 17011.