Life insurance plays a big role in financial planning. It is one of the must-have financial products due to its life-saving purpose as income protection or replacement.
And term life insurance is one of the two general types of life insurance. The other one is permanent life insurance. But in this article, I will only focus only on the former one.
So, what is term life insurance? According to Investopedia,
“Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.”
It is also important to note that it can be renewed automatically without the need for proof of insurability. In addition, some of the factors that determined how much your premium are your age, health, and gender. And of course, insurance coverage also can affect it. Depending on the amount, you may be also required to have a medical exam.
Types Of Term Life Insurance
There are three types of term life insurance.
1.) Yearly Renewable Term. The coverage is only good for one year thus you need to renew it yearly and the premium increases with age. It is good for temporary income protection.
2.) Level Term. The coverage depends on your policy (e.g. 5 years, 10 years) and the premium is fixed within the coverage. It is good for young breadwinners who need maximum coverage at a lower cost.
3. ) Decreasing Term. The coverage decreases at a predetermined rate and it becomes zero at the end of the contract. For the premium, it is payable at half of the contract (e.g. 10-year term contract payable 5 years). It is ideal for securing mortgage loans.
The main advantage of term life insurance over the other types of life insurance in the Philippines is its affordability. Given that the same person will avail and with the same insurance coverage, you can pay lesser premiums. Just a rough estimation, with insurance coverage of Php 1,000,000 you can potentially save 50% of the premiums compared to the other life insurance.
However, it will become costly as you grow older since every time you renew, the premium also increases. But it is common to all insurance products that the older you are, the higher the premium will be compared to the younger ones.
What Is BTID
Buy Term Invest the Difference or simply BTID is a financial strategy. The underlying principle about this is you will separate your life insurance from investment. In other words, you will avail of a term life insurance and you will invest your money separately on whatever investment vehicles that will suit your goal.
You will also frequently encountered BTID along with VUL. Why is that? Because Variable Universal Life (VUL) is life insurance with investment. The similarity between the two is they are both life insurance and both involve investing your money. However, VUL is a financial product while BTID is a financial strategy.
How does it work? Why there are people applying the BTID strategy? Since term insurance is cheaper than VUL, the money they can save (the difference of the premium) will be invested.
For illustrative purposes only, let assume that the annual premium for term insurance is Php 6,000 and for the VUL is Php 36,000. There is a Php 30,000 difference which can be added to your investment portfolio.
Of course, there are pros and cons to doing it. One of these is, you should have discipline when it comes to investing when you employ the BTID strategy. Unlike on VUL, a portion of the premium is allotted for investment.
You can read my other article about BTID versus VUL to know more between the two.
Is It For Me?
Now, the next question is “Is term life insurance is BEST for me?”.
Yes, it can be the best life insurance for if you belong to the following:
1.) You are looking for budget-friendly life insurance with maximum insurance coverage (high coverage but cheaper premium).
2.) You think you need permanent life insurance but cannot afford it yet. Most term life insurance is convertible to permanent life insurance.
3.) You believe that you only need life insurance for a certain period of time like when you are raising your children.
Recommendation
Here are some of my recommendations or things to consider when availing term life insurance.
1.) Avail term life insurance while you can’t afford to buy permanent life insurance and convert it later on. Term life insurance is convertible to permanent life insurance (but better to verify it to your financial adviser if it is one of the features of their product). The important thing is you have income protection especially if you are a breadwinner and the sooner is the better.
2.) If your concern is the increasing premium every time you renew your policy, avail a level term instead of yearly renewable term life insurance. Level term life insurance has a fixed premium up to the end of the contract (e.g. 5 years, 10 years). It is also ideal for young breadwinners who needs maximum insurance coverage at a lower cost.
3.) If you want to avail of a VUL because it is bundled with investment but cannot afford it yet due to its high premium, you can choose a term life insurance with a premium deposit fund (PDF). If you are looking for life insurance with investment for force saving and less hassle, there is an alternative product to VUL. You can avail of a term life insurance with PDF.
Though, one of the reasons why many Filipinos do not appreciate the term life insurance is that they will not receive any amount just in case the insured outlives his or her policy. They think that it is a waste of money.
Is it really a waste of money?
I believe it is NOT a waste of money.
First, the main reason why you need to have insurance is to have income protection especially if you have dependents. What will happen to your dependents if you, as the only breadwinner, was taken by God? Life is full of uncertainties. It is better to be prepared than to gamble. And through life insurance, their financial needs will be addressed.
Secondly, life insurance is not the best option to grow your money. If what you have in mind is to receive returns in the future, then life insurance is not the right solution. This is also the reason why people get disappointed with their policy especially if it comes with an investment. If it is not clear to you why then go back to the first reason (above).
Lastly, it is not totally true that you will not receive any amount in the future if you outlive your policy. There is a term life insurance that has an investment too. A product that has a premium deposit fund (PDF) and guaranteed not to have negative growth.
Hopefully, I was able to give clarifications regarding term life insurance. And you have still some queries, do not hesitate to comment.
That’s it. Easy to understand, right?