I have planned to write about this a long time ago, but procrastination always gets in the way, so my apologies for delaying this post. This should have been one of my earlier posts as it gives the necessary knowledge about the life insurance.
I’m sure once a person realizes the importance of financial planning, you cannot take away protection or in short, life insurance. The latter will always be attached to financial planning, as well as investments. (Importance of Life Insurance)
However, a lot of people would usually have this question in mind. What’s the best life insurance for me? The answer to this question is always given by the life insurance agent as they usually based the proposal on the need of the client. But we cannot deny the fact that some agents may not always do this. Knowing the different types of life insurance policies will help you get the right plan. So with this article, we’ll arm you with some ammo when facing the battle with your agent.
Before, we only have the so called Traditional Life Insurance. But as time goes on, insurance companies began offering Non-Traditional Life insurance.
Traditional Life Insurance
- Term Life Insurance
- Whole Life Insurance
- Endowment Life Insurance
Non-Traditional Life Insurance
- Variable Universal Life (Variable Life Insurance or VUL)
TERM LIFE INSURANCE
Term life insurance provides “pure” life insurance coverage for a specific period of time. In case of death within the term period, your beneficiary receives the death benefit. If you live past the term period, your coverage ends, and you get nothing back.
A term insurance is the cheapest form of insurance protection. Why? Because it has no savings. There is no cash value or dividends. It has a term ranging from 1 year to 10 years or more. You can renew the policy for a new term regardless of health or insurability, but at a higher premium level. This makes your term policy much more costly as you get older.
A term insurance is right for you if you cannot afford a whole life plan now. You can also use term policy for loan or debt because it provides just sufficient life coverage to pay off the outstanding balance of the loan or debt.
You have the option to convert your coverage to permanent insurance or even non-traditional regardless of your health status at the time of conversion.
- Example of Term Insurance is Sun Life Assure
WHOLE LIFE INSURANCE
Whole life or Permanent insurance provides coverage for your whole life or until age 100. It also requires you to pay for your entire life. It combines protection and savings. Your premium pays for the costs of insurance and part of it goes to build up cash values as savings. The cash value can grow up to the amount of sum insured. It is a participating plan and may earn dividends but not guaranteed.
Whole life insurance provides death benefits (face amount) and living benefits (cash values and dividends). The amount of death benefit or face amount is the sum insured plus accumulated cash values and dividends. Living benefits on the other hand is the cash values and dividends. Living benefits from the word itself can be obtained while you are still living. Premium for whole life policies remains constant. (level premium)
The living benefits can be used to fund a future financial need such as college education of children or retirement. When you get all such benefits, the policy terminates and you are no longer insured.
The policy endows or matures normally at age 100. Some plans mature earlier. You get the cash value equal to the face amount plus accumulated dividends when you outlive your policy. That is if you live up to 101. 😀
ENDOWMENT LIFE INSURANCE
Endowment Life Insurance provides coverage for a limited period. They grow cash values very fast. They can build a future fund for a definite purpose – retirement, college education of a child or other financial need. They also give protection in the form of death benefit.
An endowment policy pays at a given time, e.g. 20 years, or if death should occur before the given date. It also provides dividends (but not guaranteed). The death benefit is the sum insured plus cash values and dividends. The policy ceases upon endowment or death of the insured.
The cash value of a policy builds up because of level premium – the premium is the same all throughout the life of the policy. Whole life and endowment policies have level premium.
- Example of Endowment Life Insurance is Sun Peso Provider
VARIABLE UNIVERSAL LIFE / VARIABLE UNIT LINKED INSURANCE / VUL
A Variable Life Insurance product is an insurance plan with benefits directly linked to the performance of the unit of investment fund/s you choose (usually equity fund, balanced fund, bond fund, money market funds etc.)
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It’s like a whole life insurance combined with mutual funds. How? Same with whole life insurance, the premium is level up to age of maturity (age 88 to others and age 100 to some). Life is protected up to that age. Like mutual funds because the investment part is in form of units. However, unlike whole life, VUL does not have guaranteed cash values as well as dividends. On the other hand, one can have the greatest opportunity to maximize its cash value. The face amount and death benefit may vary based on how the investment portion performs.
This shows variable universal life as an investment. You know the charges and how much goes to investment from the start. Charges include cost of insurance, fund management fees, policy fee and other expenses. As an investor, you reap all the returns but bear all the risks. But you can minimize these risks using Cost Averaging.
- Example of VUL Plans
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Should you need an advise on your insurance policies, please feel free to contact me at 09164147400 / garrydc@financialplanningph.com or you may simply fill in the comment form below and I’ll reply to you as soon as I can.