Life Insurance Philippines
Life Insurance is a monetary security against the loss of income that would occur if the insured faces an untimely death. In such a case, a named nominee or beneficiary receives the benefits and proceeds of the insurance policy and therefore receives the monetary security. He/She is therefore safeguarded and protected from the financial impact of the death of the insured.
Essentially, it is a policy between the insurer and the policy owner, wherein the insurer agrees to pay the insured’s nominee or dependent, a monetary benefit in case of the insured’s death. In turn, the insurance policy holder agrees to pay a fixed amount called ‘premium’ at regular intervals of time.
Life Insurance is the most economical and efficient means of achieving financial security for the future.
The main objective of life insurance is to be able to provide financial security for your dear ones after your death. Hence, before investing in a rewarding life insurance policy, you must relook your financial condition and lifestyle and plan the standard of living that you want for your dependents after you die.
Life Insurance Policy Classification
Most Life insurance policies are classified under 4 categories:
|According to||Types||What they offer?|
|Nature of the policy||Temporary Policy||Offers only protection or death benefit over a limited period of time.|
|Permanent Policy||Offers death as well as living benefits during the lifetime of the policyholder. These benefits could be in the form of endowments, cash or dividends.|
|Coverage provided by the policy||Individual Policy||Provides insurance coverage for one person only.|
|Joint Life Policy||Provides coverage for the lives of more than two individuals.|
|Group Policy||Provides insurance coverage for a group of people/ a family.|
|Participation for a share in Dividends||Participating||Entitles policyholders to receive dividends that are collected from the profit or surplus earnings of the insurance company.|
|Non Participating||Does not entitle policyholders for a share in the dividends.|
|Line of business/Market Segments||Ordinary||Caters to tier 1 and tier 2 income-earners. Payable on a quarterly, biannual or annual basis.|
|Industrial||Caters to tier 3 income-earners. Can be paid on a daily, weekly or monthly basis.|
|Group||Caters to insurance coverage needs of organizations and employee groups. The premiums are usually deducted from the employee’s salary.|
Types of Life Insurance Policies
Life insurance categories largely fall into two groups:
- Term insurance
- Permanent insurance
Permanent insurance is further divided into subcategories. They are:
- Whole life insurance
- Universal life insurance
- Variable life insurance
- Variable universal life insurance
Term Insurance is best suited for those individuals who are looking to cover a short-term need. The need could span over funding their child’s education or replacement of income during working years. As the name suggests, this insurance is temporary or for a short fixed period of time, commonly observed to be 5 to 30 year terms. Since it is temporary in nature, the premiums are inexpensive compared to permanent policies with a more comparable death benefit.
Individuals who choose to invest in a term insurance sign up for a policy with the insurance firm that promises a specific and defined death benefit in return for a specific and defined premium amount for the duration of the policy. If the policyholder passes away during the term, the nominee or beneficiary receives a complete tax-free death benefit payout.
- Provide protection for dependents of a young couple who can afford to keep aside a small fixed amount of money at regular intervals of time convenient to them.
- Cover debts and loans that need to be repaid within a limited period of time.
- Accumulate money over a period of time for a fixed purpose.
Permanent Life Insurance
Permanent life insurance provides policyholders or the life insured a benefit that they can use during their lifetime. This is known as the policy’s cash value. The further classification of permanent life insurance as follow:
- Whole Life Insurance
In a whole life policy, fixed number of premiums paid are saved into a cash value account within the policy, thereby forming a savings account for the policyholder. The balance accumulated in this cash value account will receive a fixed rate of return on the entire term of the policy. These funds are tax deferred and can be borrowed during the policyholder’s lifetime. Should there be any unpaid balance against the loan taken from the account holder's cash value account, the amount will be deducted from the final death benefit paid out to the nominee.
Because of the assurance from the death benefit and the rate of interest applied to the amount accumulated in the cash value account, the premium for this insurance is far more expensive than that of a term insurance.
Hence, individuals who are looking for long-term protection needs such as retirement income for a spouse etc. are best fits for this kind of policy.
Suited for situations where the insured-
- Can afford to pay premium during his productive years despite the premiums being higher than ordinary life insurances.
- For juvenile insurance situations where a parent wants to start a child’s policy that will be paid up at an early age in their life.
Universal Life Insurance
Under Universal life insurance, policies provide a tax-free death benefit to the nominees based on the amount of premiums paid over a period of time. Here, policyholders have the flexibility with regard to the terms of premium amounts to be paid, total death benefit and the payment frequency itself.
In this type of policy, the potential of earnings on the cash value balances is high and after completion of the first year of the policy, policyholders can choose to skip, increase or decrease premium payments as long as the cash value balance in the account is able to cover all the policy expenses.
Policyholders also have the flexibility to select an increasing death benefit payout or a fixed benefit payout for their beneficiaries. The former is the equivalent of the pure insurance death benefit plus any accumulation in cash value balances.
These policies are inexpensive compared to whole life policies and you receive a fixed minimum interest rate which lower for universal policies, but the premiums are more expensive than term policies.
Suited for situations where the insured-
- needs coverage for mid term to long term financial objectives
- require more flexibility in premium amount and frequency of payment.
Variable Life Insurance
Apart from long-term coverage and cash value benefits as whole and universal life policies provide, the amount for Variable life insurance premiums are fixed just the way they are in whole life policies, but in this case, the death benefits and cash value balances fluctuate from time to time.
The cash value balances in the Variable life insurance policy are invested in various subaccounts that are tax-deferred and have tie-ups with the insurance company. The policyholder can choose the accounts he wants to invest in.
After the policy charges are met and the investments made, the performance of the subaccounts are observed. When the subaccounts that are invested in perform well, a policyholder's death benefit and cash values rise. Similarly, when the subaccounts are at risk, both the death benefit and cash value fall.
Cash value balances continue to grow tax-deferred. The amount accumulated in the cash value account is available as a loan to the insured while he is still alive. Policyholders of variable life insurance and universal life insurance pay similar premium amount.
Suited for situations where the insured-
- is looking for a long-term coverage.
- takes on the risk of the sub account's performance rather than the insurance carrier.
Variable Universal Life Insurance
Variable universal life insurance, as the name suggests is an amalgamation of variable life insurance and universal life insurance.
In variable universal life policy, policyholders have innumerable investment subaccounts that are available to invest in. Flexibility in the premium amount as well as the frequency in which it could be paid are some of the features of Universal Life policies that are available to the Variable Universal Life Insurance policies as well.
Premium amounts above the total policy outlay are covered first. The rest of the amount is invested into choices made by the policyholder into the cash value account. The cash value within a variable universal life policy continues to rise, is tax-deferred and can be availed as a loan if there is a need, while the policyholder is alive just the way it is available in other permanent policies.
The flexible nature of a variable universal life policy results in the premium amounts being slightly more higher than universal or variable life policies but comparatively much lesser than whole life policies.
Suited for situations where the insured-
- is looking for a mid to long term coverage and willing to take on the risk of the performance of the subaccounts.
- requires the advantage of deciding the premium amount and frequency of payment.
Life insurance is an important part of financial planning. Since there is no single specific type of life insurance that is appropriate for every individual, evaluation of time frame of coverage, total amount of death benefit needed and willingness to take on risks related to the cash value account are indispensable to determine which type of coverage is appropriate for the policyholder’s needs.
Benefits of having Life Insurance
- Life long protection for your family.
- Provides a definite sum of money to replace a breadwinner’s lost income for the benefit of his family in case of his early/untimely or premature death.
- Long term savings for a fixed goal in the future
- Build cash value for loans for college expenses, mortgages, etc.
- Secure and profitable method of accumulating funds for illness, injuries or emergencies.
- Reliable retirement income
- Build credit
- Fund trusts, or buy-outs in businesses
When you buy a life insurance policy, you are actually buying peace of mind, security and protection for yourself and your family. Also, life insurance provides savings, investment and a reliable retirement income.
Life insurance is the most essential and basic level protection available for your family and helps ensure future needs are met, pending debts repaid and that your family maintains its standard of living, no matter what life brings. In short, proceeds of life insurance can actually replace the liveable income and provide financial assistance to loved ones.
You don’t buy life insurance because you are going to die, but because those you love are going to live.
FAQs for Life Insurance
- How does one decide the length of the term while buying an insurance policy?
- Can one buy life insurance that will pay out whenever they die?
- How much life insurance does one ideally need?
- Can the policy pay out a fixed sum as regular income at regular intervals rather than a large sum at one go?
It’s really up to the person buying the policy. One might want to ensure that the policy lasts as long as your debt. Or maybe prefer to consider the term to the age of their children so that it does not expire until they reach 18, or finish college.
Yes you can. If you want to be sure that your family will be able to claim the pay out or sum assured whenever you die, you can take out whole of life insurance. You then have no restrictions of a policy term.
The amount of sum insured depends from individual to individual on based on each one's personal financial situation. It depends on how much you can afford to save without compromising on the quality of your standard of living. Most often a sum assured equivalent to at least ten times your income per annum is highly recommended.
Yes. With the family income benefit, your beneficiaries will receive a regular income upon your death.