Wednesday, October 5, 2011

To Be or Not To Be Insured... That is not the only question

While researching on life insurance, I found a helpful article by John Miele with a funny-but-close-to-my-reality anecdote:

...the topic came up about my promise to take care of (my wife)... I said something to the effect of, “Well, I have started an investment account for you and I’ll buy you a few hundred thousand dollars in life insurance.”
(Wife) said, “You ARE NOT going to die!!!!”
I responded, “Ummmmmm… Don’t think I’ll have much choice when the time comes.”
Followed by her retort, “You are not ALLOWED to die!”
What else can I say but, “Yes ma’am, you are right.”?
I got a life insurance plan around 3 years ago when I was 22 y.o. They say that it's better to get insurance early on because the premium will increase as one ages (or if one's "insurability" decreases -- this happens if a person becomes disabled or contracts a terminal illness. In the latter case, the person might not even be insurable). So I signed up and have been paying my premiums diligently since.

But I didn't really understand life insurance plans at the time that I decided to get my own (believe it or not, I actually ended up getting TWO!). The only questions I had then was how much do I have to pay, how often, and how much do I get when I die... I didn't even bother asking myself if I really needed Life Insurance in the first place. It sounds silly but I *think* I've managed to learn a little more - so allow me to share what I've learned, and please correct me if you spot any misconceptions.

The beneficiary of your life insurance plan will NOT be you*. It will be your dependents, the people you leave behind to fend for themselves in the cruel world... This is on top of whatever they inherit from you. BUT just like inheritance, there are times when the death benefit is taxable because it is considered as part of the "estate" you leave behind. Hopefully there's still something significant left after taxes! ABS-CBN news has an article entitled "Four Reasons for Buying Life Insurance" - read it here

*Generally speaking. However, there are certain policies that will pay you when you reach a certain age like 90 y.o. instead of waiting for you to die.

There may be others but so far I'm just aware of two main types:
  1. Term. Term life insurance means that a person is only covered over a specified term. The term can be one year*, 10, 20 or 30 years. Person pays a premium (regularly?) and IF that person dies within the defined term, beneficiaries receive the death benefit. If person stays alive, the policy expires and the premium/s are never seen again. How expensive term insurance is will depend on the likelihood of the person dying within the defined time period. Some plans have a provision called guaranteed reinsurability which allows the person to renew a policy after the term expires without needing to submit proof of insurability (e.g. proof that you didn't fall terminally ill). Some plans can be converted to permanent life insurance but with certain provisions (like you can only convert it before you reach a certain age).
  2. Permanent. Permanent life insurance covers a person until his/her inevitable death. So person pays a premium and WHEN person dies, beneficiaries receive the death benefit. This is usually more expensive because person will die sooner or later and the insurance company has to make sure that it has earned enough to cover for said person's death. Under permanent there are different types but I don't really understand the nuances anymore. I do know that there's one kind where the death benefit is fixed (doesn't change) while there's another kind where it's variable (it decreases/increases based on the performance of the fund you choose).
*Accdg to Wikipedia --
Because the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchase of only one year of coverage is rare.
(Nai's note: but I would assume that it would be really cheap?)


Of course the answer is "it depends" - on how much you're willing to pay and how much you need to leave behind.

I know people who prefer to get term insurance to ensure that their family will be compensated in case of untimely death only. So after the kids all graduate from college, the assumption is that they will be financially independent already and will not need the death benefit as much. As mentioned earlier, this is usually cheaper than permanent but it depends on the defined term - the longer the term, the more expensive.

On the other hand, other people prefer to leave more than inheritance behind to ensure that things like medical/funeral expenses are covered without having to touch the inheritance. And for those who opt for the variable permanent life insurance plan, there is a chance that the death benefit increases - sorta like an investment... However, Merkel notes in his article that "Most policies don't start to build respectable cash value until their 12th year, so ask yourself if the (investment) feature is really worth it."

Of course one may also just choose NOT to get a life insurance plan! Allow me to say that this is a valid choice especially if you feel that you can invest your money elsewhere in order to achieve the main objective of a life insurance plan which is to ensure that your death will not drastically impact the financial situation of your beneficiaries (e.g. ability to pay for college).

Philippines - Life Expectancy at Birth (so this doesn't factor in lifestyle choices like diet, smoking)
Total Population: 71.66 years
Male: 68.72 years
Female: 74.74 years (2011 est.)
The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured... (hehehe)
Wikipedia! Life Insurance , Term Life Insurance
Life Insurance in the Philippines by John Miele (for Live in the Philippines webzine)
5 Pointers When Getting a Life Insurance Policy by Garry de Castro, a SunLife Phils Insurance agent
Insurance Code of the Philippines from the Chan Robles Virtual Law Library
Philippines Demographics Profile 2011 by Index Mundi
Life Insurance: Putting a Price on Peace of Mind by Steven Merkel

Whew! Hope this helps.

P.S. I am NOT selling insurance. At least not yet ;)