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Common Insurance Myths, Debunked

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Do you know about these common misconceptions?

by Jean Chatzky

How informed are Americans about insurance basics? Not very. According to a new survey by InsuranceQuotes.com, 60 percent of Americans do not know if they will be penalized for not having health insurance this year. (There are more than a dozen reasons you can use to avoid the penalty, but it doesn’t go away until 2019.) This is just one of the stats that point to Americans generally being misinformed about life, home, auto and health insurance policies — and because of this lack of awareness, their wallets could be hurting. Here are some common myths — and the realities.

Myth: Term Insurance is always the cheapest way to buy life insurance

For short term need — less than 10 years — this is true, but if you want to carry life insurance for the extent of your life, permanent insurance can sometimes be lower in overall cost. That’s because while premiums on permanent insurance are higher than those that are term, when you factor in the fact that permanent insurance has an investment component (what insurers call a “cash value”) the numbers add up differently, explains Mark H. Ehrenreich, an Employee Benefits Broker/Consultant in New York City. The most important question to ask yourself before buying is how long you think you’ll need coverage. Use those parameters to shop smartly around.

Myth: If something’s stolen from your car, your auto insurance will cover it.

It’s logical to think that your auto policy covers this sort of thing, but it actually only covers the vehicle, not the removable personal contents inside like your cell phone, purse or wallet. Which is not to say those items aren’t covered at all. Your homeowners or renters insurance policy will typically step in — a fact that nearly two thirds of the people surveyed don’t know.

Myth: You don’t need life insurance after you retire

Whether or not you need life insurance depends on whether or not you are financially supporting other people — and whether you need more money than you have to continue to do it. If you’ve got substantial assets, you may be able to drop your policy at this point. But many people do not, says Ehrenreich. The key is to consistently evaluate your need for this insurance and decide if it’s something you want to continue to pay for.

Myth: A cash value life insurance policy is an expense

If the policy is an expense, it’s natural to want to pay as little as possible. “However, cash value policies have an investment element, and they can sometimes offer an attractive rate of return. If you have an opportunity to invest more money at an attractive rate of return — for example, by using dividends to buy paid-up additions [to your policy] — why wouldn’t you?” says fee-only life insurance advisor Glenn S. Daily.

Myth: Health insurance carriers make unlimited profits

By law, health insurance carriers must meet something known as medical loss ratio calculations. “The Affordable Care Act requires that 80 percent of premium dollars be spent on claims and efforts to improve quality of care, the remaining 20 percent can go to expenses,” says Ehrenreich. He adds that any amount in excess of this is returned to policyholders.

Myth: Women pay more auto insurance premiums than men

Some 60 percent of people don’t know that women, on average, pay lower auto premiums than men. Rates for car insurance are based gender, type of car, crash tests and cost of parts, home ZIP code and other variables. People in any group that has more claims filed statistically across the country will be slapped with higher prices on their auto insurance, even if they, as individuals, have a clean driving record.

With Hattie Burgher