Contrary to common belief that life insurance is a waste of money, we as individuals face several types of personal risks. The risks of getting sick, getting disabled, dying young, and growing old are some of these risks. Hence, we need to manage these risks! And the best way to manage these risks is to transfer it to someone else, to an insurance company. The insurance company issuing a policy with a person insured will compensate such person should any of the foregoing risks arises. This ‘assumption of risk’ is in exchange of a monetary consideration is called an insurance premium. Unknown to many, there are several types of insurance are there are several types of risks. In the Philippines, we have these general types, namely, ordinary life, term insurance, endowment, and newest type, an investment link product or a variable universal life (VUL). We will explain each type below.
An ordinary life policy is paid by the insured until 100 years old. It comes with a savings fund where it accumulates a cash value. The advantage of this is the beneficiaries are likely to get a benefit when the insured dies as long as the policy is enforced. The disadvantage is that the long term payment discourages people to get and the constraint of paying more for less coverage. There are variations however, where more money out of the premium is placed on the savings fund in order to shorten the payment period.
The opposite of an ordinary life is a term policy. This is much like an insurance renewed every year. The simple comparison for this is that of a motor car insurance that you avail of every year. Unlike the other life insurance where the contract is a long term, the term insurance is a yearly contract. The insured is not obligated to continuously pay the premium. It is a no premium payment, no coverage arrangement. The advantage of this type is cost, it is the cheapest kind. The disadvantage is that it doesn’t provide any cash value at the end of any period. The disadvantage is that the premium on this type is normally increasing every year.
Another type is an endowment insurance where it is normally a 20 years to pay arrangement such that the insured is covered until the 2oth year but should he/she survives, a lump sum benefit will be given as if the whole insured amount will be given back to the insured and the insurance coverage stops. Or he/she may opt to get a portion of the ‘endowment’ sum and continue to be covered. The disadvantage of this type is that it is mostly expensive. While the nice thing about this type that attracts many is that concept that in the future you will get you money back. As opposed to a normal insurance concept that the insurance money will be enjoyed only by the beneficiary, in the case of an endowment, the insurance money can be enjoyed by the insured person.
The newer type (in the Philippines) is a new breed of life insurance called variable universal life or VUL. In other countries these are called investment linked products. Introduced in the late 90’s, it is simply a combination of a term insurance and an investment fund. There are several variations of variable universal life (VUL), there is a single pay premium and a term pay premium of either 5, 10 or 20 years. The advantage of this product is that it’s like an all in one, an insurance coverage and an investment fund put together. The disadvantage though is lack of flexibility as to how much insurance you can purchase and the long term nature of the investment.
As to the factors of how one should consider a life insurance policy depends on the circumstance of an individual. Perhaps a single person may consider a policy that has greater underlying value or cash value, or perhaps one that has an investment in it. For people who are heads of the family, can consider a larger sum of coverage with lesser cost. A term insurance is likely appropriate. The reason why there are various types of life insurance is to be able to address various needs of individuals depending on their goals, circumstances and needs.