Life InsurancePosted on October 7th, 2012 under Wealth of Advice
By Francisco J. Colayco
We have been talking about preparing for the inevitable. Protecting yourself because you are your most important income-generating asset. Life insurance provides benefits to your beneficiary upon your death.
I am not an insurance expert nor am I an insurance agent. However, we can discuss insurance from a common layman’s point of view and how you can assess whether you should cover yourself or not. You must remember that insurance costs money. You pay a premium for your life protection depending on the type and amount of coverage. You want to make sure that you put that premium payment on an insurance policy that you really need. Insurance is not for savings unless there is a savings component attached to it that you should understand. Technically speaking, insurance is really for protection. The general purpose of life insurance is to “replace” your income that your dependents would be losing in the event of your demise. In effect, it buys them time to develop their own source of income when you are gone.
Whole Life insurance is the most popular type that most insurance agents are motivated to sell because of the importance that people put on providing for their dependents in the untimely event of their death. This is also because this type of insurance offers the highest commission income.
However, Insurance is really needed only when one has dependents who have no source of support other than one’s current income. Thus, insurance should be limited to those who are earning and/or have assets that have value and can be used for the benefit of dependents. Should your child then who is not earning any income be insured? The answer is NO. Unless you want to take advantage of your child’s death, there is no need to insure him. The exception would be if he is already earning income that your family is dependent on. For example, if he is a child-star and actually the major income-earner in your family or company, then, perhaps, you can consider insuring his life.
Certain types of insurance policies are also suitable to meet the needs of those who are into estate planning and related concerns. There are also some taxation benefits offered by these types of insurance coverage. This would generally apply though, to high net worth individuals and families.
For the majority of income-earning individuals, there are many ways of packaging a life insurance policy. The usual choices are whole life, universal life or term life insurance.
Whole life usually means that the insured will have to pay premiums for quite a long time , e.g. 20/30 or even longer, even until the day he dies. The annual premium payments for this type of policy are generally fixed. Universal Life is similar to whole life in tenor but have variable premiums based on the investment performance of the premiums collected and invested by the insurance company.
Term Life insurance means that the insured is covered only on a year-to-year basis and, in some cases, only for a certain number of years. The premium for Term life is much lower than the Whole life particularly if one gets his coverage as part of a group. For individual term life, premium rates increase as the insured grows older.
There are different types of life insurance and an insurance agent can best explain each type to you. In assessing the policy being offered to you, take care to understand:
- What is your real purpose for buying this particular policy?
- Is the policy being offered a correct match?
- What is the rating by the Insurance Commission of the proposing insurance company?
- Is the amount of premium reasonable and competitive?
- What is the amount and type of benefits your beneficiary will get?
- What are your options if you cannot continue paying the premiums?
- What events will cause the policy to lapse?
Many times, the person buying the insurance is reluctant to ask basic questions to understand the insurance product. He may feel that he is imposing too much on the agents and/or perhaps even doesn’t want to let the agent know that he doesn’t understand. This should not be the case as actually, agents are very used to repeating their explanations. They cannot be agents if they are not patient and ready to be repetitious. In fact, if you are sincere in wanting to buy a policy, they will hound you. Do not hesitate to ask your questions before you sign up. And if you have signed up, you still have a certain number of days that you can back out of the agreement without penalty. Understand this well and continue studying your policy until you are sure you want it. It is also recommended that you consult with other insurance providers to be able to assess what is best for you.
The insurance companies can be very creative in providing policies that can answer protection needs as well as some savings component. However, you must understand that when buying insurance, the savings component is a separate consideration. Insurance is technically for risks that you are protecting the beneficiaries of the insured person. If you want to grow your savings, you should be looking at other available instruments.