[Fin Talk] Life Insurance 101
By Arlyn Tan
How do you perceive the value of life insurance? How do you feel about the person selling life insurance policies? Do you believe in the stability of life insurance institutions and its promise to payout the death benefit when an untoward incident happens?
I would like to take this opportunity to share with you the answers to common questions about life insurance to amplify its value and minimize the resistance of the decision maker.
Why should life insurance be part of the portfolio of a person? Life Insurance is the financial tool where one pays a certain amount (known as a premium) so that the company will cover the risk of economic losses related to premature death and sickness of a person. The value lies in having a large reserve relative to the premium paid to the risk management provider or commonly known as life insurance company. During unexpected deaths of breadwinners and key people, the sudden halt of income streams and rise of expenses can negatively impact the beneficiaries in terms of lifestyle & quality of life.
When a person does not purchase life insurance, he will need to make sure that he has enough money to cover the present and future costs of the dependents and beneficiaries related to his demise. In a scenario where his assets and investments are enough to cover, then he does not need to apply for life insurance. However, people who are good in money management opt to leverage this tool so that they have more funds for investments in business or hard assets. They would rather shell out premiums and outsource the risk to insurance companies.
If this is the case, what is the reason behind children being insured? There is an option that the premium payments are waived when the payor is disabled or dies before the child reaches the age of majority. There are policies that have endowment pay-outs and fund values which are precomputed to fund education. In the case that the policy owner dies prematurely, the policy is in force to give the payouts in future dates. Complementing the endowment plans are the life insurance policies of parents to address immediate liquidity needs.
If life insurance has benefits, why is it that some people have resistance towards it and prefer to have investments instead? In the Philippines, the insurance penetration rate is at 3% in 2018. The resistance towards the life insurance purchase can be attributed to past experiences, brand impression, product value awareness and relationship between the insured and advisors. Life insurance purchase in our country is still a trust based transaction where relationships matter. Credentials of a person may be appreciated but it is not a big factor in decision making.
Some would have very positive feelings towards life insurance because of the service and the expectations were managed. Others would have negative biases because of their lack of deep understanding. Since this financial product is the least subscribed to compared to bank, UITF, stocks, mutual fund transaction and real estate purchase or sales , the terms and conditions are hardly comprehended by the insured. Insurance advisors can help simplify the content of the contract every annual review.
Life insurance is most of the time mistaken as an investment where the expectation is for it to provide yields at duration similar to traditional investments.
What is the most common type of life insurance policy that is offered in the market ?
Variable Universal Life type of insurance has gained traction in the Philippines after 2000. It is a type of insurance which is linked to Investments that can range from bonds, equities, money market to feeder funds. When one pays a premium, certain charges are deducted to cover the admin fees before they are invested in the selected funds. The policyowner does not have access to direct stocks but only funds which are managed by investment managers. There are definitely NO GUARANTEED YIELDS every year because of the nature of the underlying assets which have daily variable values depending on what is happening to the interest rates, economy, inflation, and trends.
The policy is in force as long as there is money inside the policy to pay for the insurance charges monthly. When it runs out of funds, companies offer a grace period before the policy becomes inactive. To reactivate a lapsed policy, the insured needs to answer health related questions and pay the balance. The company will evaluate the risk again associated with the health status of the insured.
The duration of premium payment depends on the contract’s allowable parameters. There is such a thing as a premium holiday where the yearly payments till the life of the policy are reduced to 10 , 15 or 20 years. This depends on the company and the game plan which you can have with your advisor.
Insure the greatest asset -you! If you are able to love, then there will always be individuals that you want to protect against mental stress and financial hardships during your unexpected demise. As Jack Ma says, You will not turn bankrupt because of buying insurance but you will cause your loved ones to turn bankrupt. No widow or family member ever complained of too much insurance. Whatever you leave behind including cash assets becomes part of your legacy. With a proper perspective on the utility of insurance proceeds, it can transform lives and sustain the families for months or even generations.
Arlyn Tan is a Strategic Wealth Consultant. She helps individuals and organizations on how to maximize the value of their money through risk, health & wealth management. Her mission lies in making sure that clients achieve 3 things. First, they reach their milestones on time with sufficient resources. Second, they protect them from the impact of economic losses secondary to unexpected events. The third and most important is that they enjoy meaningful and balanced lives.
LinkedIn/Twitter: Arlyn Tan