Chapter 11: Life Insurance

What Is Life Insurance?

Life insurance is a contract between an insurer and a policy owner.

 A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries
when the insured dies in exchange for the premiums paid by the policyholder during their
lifetime.
 For the contract to be enforceable, the life insurance application must accurately disclose the
insured’s past and current health conditions and high-risk activities.
 Life insurance is a legally binding contract that pays a death benefit to the policy owner when
the insured dies.
 For a life insurance policy to remain in force, the policyholder must pay a single premium up
front or pay regular premiums over time.
 When the insured dies, the policy’s named beneficiaries will receive the policy’s face value, or
death benefit.
 Term life insurance policies expire after a certain number of years. Permanent life insurance
policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
 A life insurance policy is only as good as the financial strength of the company that issues it.
 State guaranty funds may pay claims if the issuer can’t.

WHAT ARE THE BENEFITS OF INSURANCE?

 The most obvious benefit to insurance is perhaps the monetary benefit. The less obvious is
what benefit that money brings you:
 Tax-free payouts (for most policies)
 Retirement fund
 Savings with compounded interest from the accumulating premium.
 Family protection in case of policyholder’s death. Typically a lump-sum to fill for any financial
gaps left behind.

How Much do you Need?

You have to consider your financial needs, your income, how much savings and other investments you
have now, among other things. But as a rule of thumb, the Philippine Life Insurance Association or
PLIA suggests buying life insurance with coverage equal to 5 to 7 times your current annual gross
income.

Death, just like taxes, is inevitable, although most people may not be keen to dwell on it. But ensuring
that you have the right financial resources in place, including life insurance, is important if you have
loved ones who depend on your income. Life insurance can help cover funeral and burial expenses, pay
off lingering debts, and make managing day-to-day living expenses less burdensome for those you leave
behind. If you don’t have life insurance, or you do but are unsure about whether your policy is
sufficient, here’s how to evaluate your coverage needs.
WHAT ARE THE COMMON TYPES OF LIFE INSURANCE?

The three basic types of life insurance policies are:

1. Term Life Insurance

As the name suggests, this type of insurance policy gives you coverage for a specific “term” or
specified number of years (usually 20 to 30 years). Like most policies, a death benefit will be paid if
the policyholder passes during the time period of the active policy.

Term insurance is typically less expensive and has one of the lowest upfront costs compared to other
types of insurance. This is because it is bound by a specific time. It also gives you the biggest bang for
your buck if your focus is family protection in case of untimely passing during the term. This is because
you’re basically getting a pure life coverage without all the additional charges for features involving
investments. However, the features that make it advantageous can easily become disadvantageous for
you, depending on your need.

When you get term insurance, you have limited coverage based on your specific term. Term insurance
premiums also escalate as you age due to greater sickness and mortality risks that come with it. And
because term insurance is typically pure life coverage, you don’t get to build up capital like you would
with other types of insurance. This means when your policy expires, so does the money you put up to
keep it active.

2. Whole Life Insurance

Unlike term insurance, whole life insurance will pay for the face value or death benefit, whenever
death occurs, as long as the policy is active. A portion of your premium payment also builds up as
capital.

One of the best things about whole life insurance is that it guarantees an investment return. Payment
schemes are also easy to understand because of fixed premiums. Couple that with a cash value that
you can withdraw, borrow against, or pass the trust to your heirs, and you have a policy that’s perfect
for young families.

The trouble with whole life insurance is that it’s designed to last for the policyholder’s whole life. That
means the fund only matures once the policyholder reaches the age of 95 or 100. Premiums are
generally more expensive than term insurance because of the investment aspect. While whole life
insurance guarantees investment returns that are typically safe and predictable therefore returns are
modest. This is in comparison to investments without such guarantees.
3. Endowment Insurance

Endowment insurance takes certain features from both term and whole life. Like term insurance, there
is a focus on a specific time period. But unlike term, this time period (typically 10 to 20 years) is only
set time for the fund to mature. Like whole life insurance, endowment life insurance also builds capital
as you put in more into the policy.

One of the benefits of an endowment policy is after the term of maturity, it continues to build capital
for you. The set time period means that it matures much faster compared to whole life, it guarantees a
death benefit for beneficiaries of active accounts, and the face value is withdrawable to the
policyholder after a certain number of years. This means you would have some money tucked away to
use for your children’s college fund, for big-ticket purchases, or to pay off loans in the future.

Like whole life, guaranteed payouts from endowment insurance means that the returns will not be as
big. A shorter term for maturity also means more expensive monthly or annual premium payments
compared to whole life or term insurance.

Sources/References

https://www.investopedia.com/

https://www.moneymax.ph/

https://coins.ph/

Prepared by:

Lesley Allen D. Kabigting, MBA

College of Business Administration
Guagua National Colleges