by Armel
Life insurance is a crucial topic to consider, especially if you’re thinking about your financial future. Last year, I got my own life insurance policy and was amazed by the benefits it offers, including the peace of mind it provides and the opportunity for tax-free wealth building that many people are unaware of.
In this article, I aim to educate you about life insurance so you can determine if it’s right for you, which policy might be the best fit, and how to approach this important decision. I’ll explain what life insurance is and the different types of policies available. Then, I’ll discuss how to decide which policy suits your needs and when is the right time to get life insurance based on your financial situation. Lastly, I’ll guide you on how to choose a reputable policy and identify less favorable options, as there are many insurance agents out there pushing subpar products.
We have a lot to cover, so let’s get started.
What is Life Insurance?
Let’s start by defining life insurance. In simple terms, it is a policy that pays out a specified amount of money to a designated beneficiary upon your death or in the event of a serious incident affecting you.
When you take out a life insurance policy, you are the insured party, and the individuals you choose to receive the payout such as your children, parents, or siblings are the beneficiaries. It’s essential to understand the roles of both the insured and the beneficiary.
Life insurance is particularly important if you have dependents, especially young children under the age of 18. The thought of leaving them without financial support is daunting. If something were to happen to you, it’s crucial to ensure that your dependents have a source of income to rely on. This applies not only to children but also to elderly parents or siblings who may not have the ability to support themselves financially. If you have anyone in your life who depends on you, securing life insurance is a vital step.
Types of Life Insurance
Term insurance, as the name suggests, provides coverage for a specific period, typically a 20-year term. During this time, if anything happens to you, a death benefit will be paid out to your designated beneficiary. For example, if you purchase a 20-year term policy with a death benefit of Php5,000,000 your beneficiary will receive that amount if you pass away within the 20 years.
One of the biggest advantages of term life insurance is its affordability. For relatively young and healthy individuals, premiums are around Php3,000 per month. This type of insurance is designed to protect against unforeseen events, even though such events are rare. However, if tragedy strikes, having coverage can provide peace of mind. It’s important to note that once the term ends, all premiums paid during that period are lost, and coverage ceases.
In contrast, permanent insurance offers lifelong coverage. This type includes two main variations: indexed universal life policies and whole life policies. Permanent insurance guarantees a death benefit regardless of when you pass away—whether it’s just a day after purchasing the policy or many years later. There’s no expiration date on this type of coverage, providing assurance that a benefit will be paid out when needed.
When considering term versus permanent life insurance, think of it as akin to renting a home versus buying one. Renting is generally more affordable upfront, while buying a home involves a mortgage, taxes, and various ownership expenses. Similarly, term insurance is cheaper in the short term, but permanent insurance provides long-term security.
Accessing Permanent Life Insurance Money
One of the appealing aspects of permanent life insurance is the various ways to access the money accumulated in the policy. The most straightforward method is, of course, the death benefit, which goes to your beneficiary upon your passing. While this is an essential feature, it’s not the most enjoyable topic to consider.
Another way to access the funds in a permanent life insurance policy is through loans or withdrawals from the cash value that builds up over time. Each month, a portion of your premium payments contributes to what is known as the cash value, functioning somewhat like a savings account. While part of your premium covers the cost of insurance, the remainder adds to this cash value.
Think of the cash value as a high-level savings account that you can tap into later. You have the option to borrow against it, taking out a loan secured by the cash value, or you can withdraw funds directly, similar to making a withdrawal from a regular savings account.
A significant advantage of permanent life insurance is that withdrawals are typically not taxable. Whether you receive money through the death benefit or access funds via a loan or cash withdrawal, it remains tax-free.
Next, let’s explore which type of policy—term or permanent—might be the best fit for your needs.
Choosing the Right Policy
First and foremost, if you have loved ones who depend on your income, particularly if you’re the primary breadwinner, securing term life insurance should be a top priority. Even if your budget is tight, obtaining term life insurance to protect those you care about is essential.
The affordability of term life insurance makes it a straightforward choice. Many policies can be obtained for around Php1,000 a month, offering coverage of up to Php1,000,000. If you don’t currently have term life insurance and have dependents, it’s crucial to act quickly and secure that coverage, it’s a small cost for significant peace of mind.
If you have dependents but also enjoy a comfortable income with room to save and invest for the future, you might want to consider permanent insurance instead. This option provides both insurance coverage and a way to accumulate tax-advantaged funds in what functions like a pseudo-investment account within the insurance policy. I’ll delve deeper into this concept later in the article.
Life Insurance Without Dependents
What if you don’t have dependents? For example, if you have a dog, you might consider them a dependent, but unfortunately, pets can’t be beneficiaries on a life insurance policy. Since I don’t have children or anyone who relies on me for financial support, I opted for a permanent life insurance policy primarily as a wealth-building tool to accumulate tax-free money.
In essence, there are two primary ways to utilize life insurance in your life: first, as coverage to protect those you care about; and second, as a wealth-building tool, functioning as an additional account or savings vehicle for your future. Depending on your individual needs and priorities, the type of policy that suits you best will vary.
Choosing Between Term and Permanent Insurance
When it comes to selecting a life insurance policy, consider your coverage needs. If you’re primarily looking for coverage, term life insurance is a solid choice. On the other hand, if you have some extra funds available and want additional savings options, think about a permanent life insurance policy.
I opted for permanent life insurance because I had already maximized my contributions to my Pag-IBIG Fund and various retirement savings options available in the Philippines. I was looking for a way to invest additional funds for the future in a tax-advantaged manner, instead of placing them in a regular savings account or other taxable investment vehicles, where any gains would be subject to taxes.
Types of Permanent Insurance
Let’s take a look at the two main types of permanent insurance available in the Philippines: whole life insurance and variable universal life insurance. Before diving into the distinctions between these options, it’s essential to understand how permanent life insurance policies operate. With a permanent life insurance policy, you pay a monthly premium, similar to what you do for health or auto insurance. A portion of this premium contributes to building cash value over time.
How Insurance Companies Invest Your Premiums
Insurance companies in the Philippines function as investment entities. They take the premiums collected from policyholders and invest them to generate returns, ensuring they have sufficient funds to pay out claims. Depending on the policy you choose, the insurance company will manage your premiums differently.
For variable universal life insurance, the company typically invests your funds in a range of investment options, including stocks and mutual funds, allowing for potentially higher returns. In contrast, with whole life insurance, the premiums are invested more conservatively, often in bonds or other fixed-income securities. The primary difference between variable universal life and whole life insurance lies in how your premiums are invested while your policy accumulates cash value.
Making the Right Choice
Choosing between whole life insurance and variable universal life insurance depends on your financial goals, needs, and risk tolerance. Personally, I opted for whole life insurance because I appreciate its stability and guaranteed cash value accumulation over time. This policy allows me to save and grow my wealth in a secure manner, ensuring that my loved ones are protected no matter what happens.
Whole life insurance provides a structured approach to wealth building while offering life coverage, which can be a crucial consideration for anyone looking to safeguard their family’s financial future. Ultimately, whether you choose term or permanent insurance, and which type of permanent insurance to select, should align with your long-term financial strategy.
When to Purchase a Policy
So, when is the right time to purchase a life insurance policy in the Philippines? If you’re living paycheck to paycheck and struggling to set aside extra funds for savings, it might not be the best time for permanent life insurance. This type of policy requires a long-term commitment. It’s essential to ensure you have an emergency fund in place for unexpected situations, such as job loss, which could affect your ability to pay premiums.
Additionally, evaluate your current debt situation; ideally, you should aim to be debt-free before considering permanent life insurance. Personally, it took me time to obtain my policy because I focused on paying off my student loans. Only after eliminating that debt did I explore permanent life insurance options.
Financial Readiness
Assuming your finances are stable, remember that starting a permanent life insurance policy at a younger age is advantageous. Similar to compounding returns in investments, beginning early can result in lower premiums and greater cash value growth over time.
For example, my friend started her policy at age 31, they would contribute around ₱400,000 by age 65, with a projected cash value of approximately ₱1,000,000. In contrast, if they had begun at birth, their total contributions would be only about ₱230,000, but the projected cash value would skyrocket to ₱2,300,000. This illustrates the benefits of starting early: lower premiums and significantly larger potential returns.
Another advantage of purchasing a policy at a younger age is that healthier individuals typically secure lower premiums due to the medical underwriting process. Waiting until you’re older, especially if health issues arise, could lead to higher costs.
Conclusion
In conclusion, life insurance is not just a safety net; it’s a crucial component of a comprehensive financial plan. Whether you opt for term or permanent insurance, understanding your financial goals and needs is essential to making the right choice.
For those with dependents, securing life insurance can provide peace of mind and financial security for loved ones. On the other hand, individuals without dependents may find value in using permanent life insurance as a wealth-building tool, allowing them to accumulate tax-advantaged savings over time.
Ultimately, the decision to purchase a policy should be made when you feel financially ready, ensuring you have an emergency fund and a manageable debt situation. Starting young can lead to substantial benefits, including lower premiums and higher cash value growth.