This article should be called Life Insurance Products 101. It is your basic introduction to this very controversial, highly feared, and often misunderstood financial planning instrument.
Life insurance is a wonderful financial planning tool. But the way it is SOLD in the market is very problematic. Take note that I emphasized on the word sold, because that is really what’s happening in the Life Insurance Industry in the Philippines.
Ignorant insurance agents – who sometimes call themselves financial advisors – are PUSHING the wrong kind life insurance products down the throats of their clients, without taking into consideration their individual client’s unique financial needs. Unfortunately, a lot of times it works for the agent because most insurance buyers are also unaware of their options or they simply don’t know how to ask the right questions.
Don’t be a victim! You owe it to yourself to become financially educated most especially with this very important fiinancial planning instrument.
If you – or someone you know – are planning to buy a life insurance, don’t do it until you get familiar with it. Be aware that most insurance products sold in the market are of the WRONG kind.
However, I’m not going to tell you here which life insurance product is right and which one is wrong. The focus right now is to show you the different types of life insurance available to you.
IMPORTANT: If you think other people can benefit from reading this article, please share it to them. Spread the word and you also help other Filipinos become financially literate in a simple way.
Term vs Cash Value Insurance
Life Insurance products can be categorized into two:
1. Term Insurance — Also called life protection-only insurance. This is the simplest form of life insurance and very easy to understand. When the policy owner dies at a specific period or age, the beneficiaries get the proceeds.
Term insurance can be further grouped into two:
- Level Term – provides the same amount of death benefit throughout the coverage period. Normally, this is what you will be quoted when you want to avail of a term life insurance.
- Decreasing Term – the death benefit decreases in amount each year the policy is in force. This type of life insurance product is often bundled with loans such as a home mortgage.
2. Cash Value Insurance – This type of life insurance provides both protection and savings. Often referred to in the market as Permanent Insurance, but that label is also the cause of a lot of confusions, and so I like to use the generally accepted label, “Cash Value” — a name from which the savings component of the product is derived.
More On Cash Value Insurance
Now Cash Value insurance can further be grouped into two:
1. Whole Life Insurance provides protection up to the age of 100 years and premiums are also payable up to the maximum age of 100. With whole life, the policy owners build up savings in the form of cash values, which they may opt to take out and enjoy.
There are so many variations of whole life insurance products from the simple to the very complicated, but basically they differ in the way the cash value is built up. There are those whose cash values are guaranteed, while others are not. Some whole life plans tie your cash values to the performance of the company and they may give out dividends at the end of the year.
There are newer products which bind your cash value to some underlying investment funds, say mutual funds. The industry calls this Unit-Linked Products (ULP) or Variable Unit-Linked (VUL) products.
2. Endowment Insurance Plans. The main feature of this type of insurance product is that there is a maturity benefit which you can claim at a specified period. The maturity benefit is the total Cash Value accumulated by your policy at maturity period
As the insurance agents would like to pitch: “You don’t have to die to enjoy the benefits of Life Insurance.” And that’s true.
(See, I’m not really against the insurance agents. 🙂 )
With endowment insurance plans, the policy owner pays for the premium for a certain number of years or until he reaches a certain age. Normally, the life insurance coverage is also only good for a specified period or until the insured reaches a particular age; beyond that you are not covered anymore.
Take Note: Endowment Insurance Plans are usually positioned as College Education Plans, Pension Plans and other similar plans that promises money for the policy holder in some future time.
We have barely scratched the surface. There is more to Life Insurance than just knowing the type of products available to you. Life Insurance is a very broad, complicated and messy subject that we file it under one special category in this website. It is a topic we will expound, explore and expose again and again as we make progress here at Pera Tree.