When you first encounter or heard “life insurance”, what comes to your mind? I bet, you immediately associate it with death. That’s maybe the reason why some people are uncomfortable talking about it. But whatever their reasons are, the truth remains the same that life insurance is important.
Fortunately, you are not the same as them since you intended to search for life insurance. It is either, you already know some information about it and you just want to know more To have a whole picture about it before buying a life insurance policy. Or, you just recently informed about it and became curious.
And if you are asking yourself too the following questions:
- ) What is life insurance
- ) What are the different types of life insurance policy
- ) Why I should have a life insurance
- ) What are the things that I should consider before buying
- ) When is the right time to avail
Then, let me guide you.
What is Life Insurance
The main purpose of life insurance is to provide financial security to your family or dependents when something happens to you. It mainly functions as a protection for the financial loss which can serve as a substitute for income.
Life insurance is a contract between you and the insurance company. As the policyholder, you will pay the premium payment for the duration of the policy and in exchange, the insurance company will pay a lump sum to your beneficiaries upon your death.
There are three main components: death benefit, premium payment, and the cash value (except for Term Life Insurance)
Death Benefit. It is the amount of money that the beneficiaries will receive upon the death of the policy owner.
Premium Payment. It is the amount that the policyholder will pay to the insurance company. The premium payment will vary depending on what insurance policy you will avail.
Cash Value. It is the money that grows in the life insurance policy. It is the amount that is available to an insured upon the cancellation of the policy or can be borrowed anytime.
Types Of Life Insurance In The Philippines
There are two general types, the term life insurance and the permanent life insurance.
Term Life Insurance
It is also known as “pure life insurance” policy since its sole purpose is to insure individuals against loss of life. A policy with a limited coverage and when the term or period is up, you can choose whether to extend or not. It is usually low cost, no cash value or dividends, renewable and sometimes can be converted to permanent life insurance policy.
It pays the face amount of the policy owner as long as the insured dies within the coverage period. If you outlive the coverage, will not receive any amount or additional cash value.
If you are young, just started your own family, and the breadwinner, availing a term life insurance is good for you since it is has a high coverage amount with low premium payments. In case something will happen to you, your dependents will receive a large amount of money.
In general, term life insurance are for people who want to have a lot of coverage but wants to pay cheaper each month or yearly compared to other types of life insurance. It is good only for providing coverage or income protection for a short term and if you are on a tight budget since it is inexpensive. However, since it has a specific period and needs to be renew, as you get older this policy becomes more expensive.
Permanent Life Insurance
Whole Life Insurance
Whole life insurance, which is also referred to as traditional life insurance, is a policy that provides insurance coverage for your whole life and matures at age 100. It has both insurance and investment component with no expiration as long as you were able to pay the premium and the cost remains the same all through the years.
The policy value is oftentimes a lump sum payment when the insured dies or when the policy owner reaches the age of 100. The reason why it is more expensive is that a portion of your premium payment is allocated towards building your cash value and its growth is guaranteed.
The cash value can be withdrawn yearly or you can just leave it to accumulate interest. Whole life insurance can also be a ‘participating plan’ which means it can earn policy dividends.
You can even borrow money against your policy but with an interest rate. There are times that you really need money, let’s say for your children’s education or other expenses. The loan balance can be paid by deducting it from the death benefit.
Mainly, it has two benefits. The death benefits which is in the form of face amount and the living benefits which refer to the cash value and sometimes dividends. If you want to have life insurance for a lifetime and at the same time preparing for your long-term goals, this will suit you.
Endowment Life Insurance
This type of policy pays the insured a face value on a fixed date or upon the death of the policy owner, whichever comes first. The policyholder can choose how much he or she wants to save every month and when the policy will mature making it flexible. It has “zero-risk” which also means low return.
It has typically high premium depending on the endowment term – the shorter the term, the higher the premium. The primary purpose of an endowment policy, aside to give life insurance with a specific period, is to build savings in the form of cash value.
If you want a policy in which you do not have to wait for a long time to reap its benefits, do not have investment risk, have life insurance for a specific period at the time setting aside money for your financial goals, this is for you.
Variable Universal Life (VUL)
A VUL or also known as Unit-Linked Insurance is a policy wherein you can have a death benefit as well as an investment attribute. Whenever you pay your premium, a part from it goes to the cost of insurance and to insurer’s fee while the remaining portion goes to the policy’s cash value. The cash value will be invested in sub-accounts available in the policy which is similar to mutual funds.
As the policy owner, you can decide which investment vehicle should the investment portion should be put. It will mainly depend on your risk tolerance, objectives, and asset allocation.
VUL does not have a secured cash value or dividends but you can have the greatest chance to maximize both. Your cash value will depend on the performance of your sub-accounts.
This policy has fixed premiums, a guaranteed death benefit, a tax deferral, an investment option, and you can even borrow money. When you avail of this policy, it is better that somehow you have an idea regarding stocks, mutual funds, and other investment vehicles. The downside is it does not offer any guarantees beyond death benefits.
Now, you have an idea regarding the different types of life insurance policy, let’s move on why you need one. Below are the benefits that you can experience.
Importance Of Availing Life Insurance
Due to the continuing evolution of life insurance, now it offers many benefits. Take time to discover the goodness of having one.
Gives Financial Protection
The most common benefit of having a life insurance policy is income protection. When the insured dies, the dependents will receive a large amount of money. It acts as an immediate substitute for the loss of income.
It may not be for the long term but it may be enough to cover the expenses for the meantime until such time that the family members can find other sources of income. Especially, if you have properly determined how much should your insurance coverage.
Serves as Retirement Fund
If the insured able to live long enough and exceeded the maturity date, the lump sum can serve as a retirement for the policyholder. The policy owner can still continue to self-support and even to provide for his family.
Works as a Savings and Investment Instrument
Aside from Term Life Insurance, other life insurance policies can offer you good returns with interest earnings. And if you avail of the Variable Universal Life policy, there’s a chance that you can grow your money through participating in the market.
Tool for Forced Saving
If you are having a hard time-saving money, then availing a policy can help you to force yourself to save. You will be obliged to save monthly and pay regularly to avoid some penalties. And in the long run, you will feel some guilt if you are going to stop paying the premium since you were able to pay already a good amount.
Helps Achieves Long-Term Goal
The cash value or death benefits can be used for achieving other financial goals. It can be used for buying a new house, a residential lot, for paying debt, or for a college education. Or buying other things than can be given as heritage.
Peace of Mind
Since there is no assurance on what will happen tomorrow, you can be at ease knowing that if bad thing will happen to you, your family is already secured financially.
Has a Tax Shield
Generally, the death benefits of the insurance policy are income-tax-free for your beneficiaries however any interests earned are taxable. There are also some life insurance policies that pays dividends to the policyholder. The dividends are in general tax-free and are considered a return to your premium. But if the dividends exceed the total premium payment, the excess will be considered as taxable income.
Things To Consider Before Availing Life Insurance
Different insurance policies have pros and cons and its suitability varies from person to person. It is recommended to consider the pointers below before buying a policy.
1. Consider your present financial status
Evaluate your capability to pay. Can you afford to pay the most expensive premiums in the long run? Or in the meantime, you can only afford the cheapest one.
2. Examine Your Goals In Life
Do you only want to save money or you want also to have an investment at the same time? How long do you intend to be insured? Will you use it for paying your debt, buying a new house, or as a retirement fund?
3. Quality of The Provider
Does the insurance company has a good reputation and is it stable? How about the agents or the financial advisers? Can they really assist you regarding your financial goals or needs? In times of claiming the benefits, does it offers smooth transaction?
4. How Much Insurance You Need
Do you plan to be insured for up to 10 years, 20 years, or for a lifetime? Who else depends on you? In case something will happen to you, how financially stable is your family? How much income do you provide? Are the benefits offered are enough to substitute as a source of income?
5. Compare Different Life Insurance Policy
Do you want it to be renewable or a lifetime? How long can you wait until it matures? Do you only prefer to have a death benefits or you want some savings or investments also? Are you a risk-taker? Does it align to your financial goals?
6. Be Familiar With The Terminologies
At first, you will be confused about hearing unfamiliar terms. Or you were able to hear it before but you are not sure what does it mean. Terms like premium, dividends, beneficiary, face amount, or cash value.
7. Do Your Homework
Do some research before setting an appointment with an insurance agent. Learn the basics about life insurance and later on do asks what you do not fully understand. By this, you can avoid confusion due to many pieces of information are being fed to you in a short time.
When choosing a policy, it should align with your goals. And better to assess also what you currently need.
If your main purpose is protection and to maximize the coverage at a lower cost, you can consider a term life insurance. On the other hand, if you want to earn savings and insurance coverage at the same time, you can choose permanent life insurance.
Do not choose a life insurance policy based popularity. There is no BEST INSURANCE product. It will always depend on what you need and which you can afford.
The Right Time To Avail
After understanding how life insurance works, the different types of life insurance policies in the Philippines, the benefits that you can have, now you will ask when is the right time to avail?
The answer is NOW. The time when you do not need it.
Life insurance becomes more expensive as you get older. This is due to an increased risk of developing a terminal illness. Do not wait for the time that you will be no longer insurable due to your health issues. The younger you are, the more affordable will be the premium payments.
Besides, who knows what will happen tomorrow? It is better to be always prepared than to regret and only to find out that it is already too late.