Are you familiar with life insurance? If not, it’s alright! You’re in the perfect place. This life insurance 101 guide can help make it easier to understand the basics about how life insurance works, the different types of policies available and the process on how you can avail a life insurance in the Philippines.
Click on any of these topics to get taken directly to that section.
- What is a life insurance?
- Why do I need a life insurance?
- Types of life insurance
- Cost of life insurance
- How to buy life insurance in the Philippines
- Tips in buying life insurance
What is a Life Insurance?
Life Insurance is a unique contract where an insurer guarantees to pay sum of money to insured or to beneficiaries upon meeting conditions (death, disability, illness, hospitalization, etc.), in exchange for the premiums paid.
Let me breakdown the terms.
- Contract – also called a policy (insurance policy), is the written agreement between you and the insurance company. It specifies the coverage and benefits you are entitled to upon meeting the conditions detailed in the contract.
- Insurer – the insurance company that offers life insurance products
- Sum of Money – proceeds/ face amount/ sum insured – this is guaranteed amount that the insurer agrees to pay you upon meeting criteria of release such as death, disability, critical illness or hospitalization.
- Insured – the person whose life is covered under the insurance policy. A policyowner/applicant may be different from the insured such as in a case of a parent (policy owner) who buys cover for his child (insured).
- Beneficiary/ies – person/s designated to receive the insurance proceeds upon the death of the insured.
- Premium – payment consideration given by the insured to make the policy in force and continue to be enforceable.
Why Do I Need Life Insurance?
The main purpose of life insurance is income protection.
Each day, you work for money and you create income. You use your income to pay for food, clothing, shelter, bills, travel, lifestyle activities, taxes, etc. Therefore, your income is your single most important asset.
What if something happens to you and you are no longer able to earn income? Are you and your family financially-prepared?
There are what we call life risks that affect the income flow to your family Most are unexpected events that people normally do not want to think about such as:
- Death – “What if you die too soon? If you are a breadwinner,what will happen to your family when you are no longer around to provide for their needs?”. The truth is, all of us will die; we just don’t know when or how. Your family need not need to suffer financially when you get a life insurance. The proceeds will ensure that your loved ones can continue living reasonable even if you’re no longer around.
- Disability – “What if you get disabled due to accident or illness?” It can affect your ability to earn income as well. Life insurance will provide proceeds that can help ease the financial difficulties of being disabled.
- Critical Illness / Hospitalization – Getting seriously ill comes with a hefty price tag. Do you have the money to pay for hospital bills and medication in case you got diagnosed of critical illness such as heart attack, stroke or cancer? Life insurance will provide guaranteed lump sum amount you can use for your recovery.
Now, there is also one expected event that imposes financial risk, and that is:
- Old Age / Retirement- When you retire or no longer work, you still have bills to pay. “What if you live too long?”. Life insurance ensures that in your old age, you will be financially independent to pay for your daily needs.
Life insurance may not be able to prevent these life risks from happening but it can help in protecting one’s income i.e. by cushioning the financial impact from loss of income.
Types of Life Insurance
There are many types of life insurance policies. It is important to understand the different types to help you get the right protection plan for you and your family.
Basically there are just two broad categories of life insurance: traditional and variable universal life insurance.
Traditional Life Insurance
Traditional insurance can be term, whole life or endowment.
Term life insurance
It provides “pure” protection or coverage for a specified period of time. If in case you die within the time period defined in the policy, the insurance company will pay your beneficiaries the face value of your policy. If nothing happens to you after the term period, your coverage ends, and you get nothing back.
Term insurance is the most basic and the cheapest protection plan you can buy. Why? Because it offers no savings, does not build cash value or pay dividends. The term period can be for 1 year to 10 years or more. You can renew the policy for a new term regardless of health or insurability, but at a higher premium cost, since it will be based on your current age upon application.
A term insurance is right for you if you are looking for a high cover amount at low premium payments, also if you cannot afford to invest in a whole life or endowment plan.
Whole Life Insurance
Whole life or Permanent life insurance provides coverage for your whole life or until age 100. It offers permanent protection (face amount) at affordable premium value and living benefits (cash value and dividends). It requires you, however, to pay or your entire life.
The amount of death benefit is the sum of face amount plus accumulated cash values and dividends. The cash values are guaranteed and can be used for your financial goals while you are living. Such can be to fund college education of children or retirement. When you get all such benefits, the policy terminates and you are no longer insured.
This plan is for you if you want to have lifetime coverage and guarantee to protect your family or if you want to plan for your estate.
Endowment Life Insurance
Endowment life insurance provides coverage for a limited period. Just like a whole life, the amount of death benefit is the sum of face amount plus accumulated cash values and dividends. The policy ceases upon endowment or death of the insured.
There are cash values that grow very fast, which you can use to build a future fund for a definite purpose – retirement, college education of a child or other financial goal. The cash values are also guaranteed that’s why endowment plans are the most expensive. This is right plan for you if you are looking for shorter terms to fulfill your financial goals and looking forward to securing the future of dependents.
Variable Universal Life Insurance
Variable Universal or Variable Unit-Linked Life (VUL) insurance is simply an insurance plan with investment component. Part of the premium amount paid is invested by in securities such as money market, stocks, bonds or combination of both.
VUL is one of the most popular in life insurance segment because of the investment component that allows you to potentially grow your money more to achieve any financial goal such as building a college fund or retirement fund. Returns are not guaranteed however.
VUL comes in two kinds: the single pay and the regular pay.
From the word itself, a single pay policy requires you to pay only one time and it is focused on maximizing the potential earnings of your money through investments.
The regular pay on the other hand, is very much like paying installments for the traditional policy, which is intended for protection, except that there is a separate investment component compared to traditional policies which has a savings component.
Cost of life insurance
There is no fixed price of life insurance. There are factors that determine the premium:
Price of a life insurance is cheaper when you are young. As you age, it becomes much higher.
Women cost less than men. That is because on average, based on statistics, women tend to live several years longer than men do.
Higher premium price is charged for smokers because of associated higher health risks.
Amount of coverage
The more coverage being purchased, the higher the premium rate will be.
If you have already acquired certain illnesses or diseases or if you have family history of cancer, heart disease or diabetes, you may have a higher premium rate.
Occupation / lifestyle
Risky or dangerous occupation such as pilot or policeman, or habits such as skydiving, hang gliding, scuba diving, or race car driving can pose higher risk -hence, higher premium.
How to buy life insurance in the Philippines
Buying life insurance is applying for it. Since insurance is a risk sharing business, insurers have underwriting process to determine whether you are insurable or not. You can be approved or declined depending on the level of risk associated with your health history, occupation and current lifestyle.
You can search for the companies that are duly registered with the Insurance Commission (governing body of insurance industry in the Philippines). You can also compare by looking at the ranking of the companies, so you can decide which one you will prefer.
If you are at least 18 years old and literate you can sign a contract and apply for your own policy. Minors can be insured too but they cannot legally sign so parents can be the policy owner and apply on their behalf instead.
If you’re good to go, here are the steps to apply for a life insurance:
Step 1 – Set an appointment with a financial advisor
A financial advisor or insurance agent should be licensed by Insurance Commission to offer insurance products. You can visit the website of your preferred life insurance company to inquire to get connected to a financial advisor or you can search in social media like Facebook or LinkedIn.
You can choose to meet with a financial advisor in person or online via video call to discuss about your interest in applying for life insurance.
During the meeting, you can ask a financial advisor to do the following:
Conduct personal financial planning
Part of the financial planning is conducting financial needs analysis (FNA) which is an assessment of a client’s current financial situation and process of determining of future needs for insurance, retirement or education. This will be the basis of the coverage and the type of insurance plan that will be sufficient and suitable for you.
Request for proposals / quotes
Proposals are free to request. The proposal contains the coverage and the amount of premium. Ideally, the best proposals are based on the outcome of your financial planning, but you may ask to have this in advance from any insurance company. It could be helpful for you to gather proposals from different insurers to compare and choose the one that will suit you.
Discuss the proposal
Some terms in the proposal may be too technical or may sound foreign to you that’s why it’s best to ask a financial advisor for a point-by-point explanation. Make sure you understand all stipulations and ask questions if anything confuses you.
Step 2 – Prepare to sign the application forms and proposal
Once you’ve decided which proposal you find is the best for you, next step is to prepare the requirements in application and sign the policy. The following are usually required to initiate the application for life insurance:
- At least one to two valid IDs.
Present the original copy of any valid and photo-bearing identification document issued by the official authority or submit a photocopy of the same.
List of acceptable valid IDs:
- SSS ID
- GSIS e-Card
- Senior citizen’s card
- Voter’s ID
- NBI Clearance
- Postal ID Card
- PRC ID
- Driver’s License /Student Permit
- Unified Multi-Purpose ID (UMID)
- Police Clearance certificate
- Other IDs issued by official authority
- Application form filled out through interview by a financial advisor.
Basic personal information, questions with emphasis on health and insurability, names of your beneficiaries will be asked on the forms. Answer all application questions honestly and do not omit information.
- Signed proposal and application form
Sign the proposal you have chosen to be suitable to you. It means acceptance of all the exclusions and inclusions of the contract. You will sign the application forms your advisor filled out to indicate agreement in all the information declared.
- Payment of initial premium
The usual minimum initial premium is one quarter or 3 months in advance. You will receive a temporary life insurance and provisional receipt in exchange for the premium payment. The temporary life insurance gets you covered for the face amount while your application is undergoing underwriting process.
Step 3 – Wait for approval and delivery of policy contract
After you have your application submitted, it will undergo underwriting process where an insurance underwriter will evaluate your risk and the potential exposure.
The insurance company is going to look at different factors to decide if they are going to accept your application for life insurance.
The criteria that are analyzed typically include the following:
- Applicant’s current age and gender
- Height and weight of the applicant
- Own and Family’s Health history
- Applicant’s occupation (hazardous occupations increase the risk )
- Applicant’s smoking habits or tobacco use (smokers tend to have shorter lives, therefore making smokers a higher risk)
- Use of alcohol by the applicant (excessive drinkers are also high risks)
- Hobbies applicant engages in (some are considered hazardous, such as rock or mountain climbing and are considered high risks)
- Foreign travel intentions (some types of foreign travel are considered risky)
Possible cases of Life Insurance Applicants
If you have a pre-existing health condition or the factors considered you as high-risk, you will be required to undergo medical examination. The application may either be rejected for coverage or approved as standard or rated. Rated means you will be forced to pay higher premiums for your policy. The whole process may take more than a month.
Clean Case Applicants
If you declared no health condition or family health history, your application is considered a clean case. Complete underwriting process up to approval usually takes 2 weeks. You may no longer be required to undergo medical exam, but may be subjected to by random done by the company periodically.
When your policy is approved you will be notified by your financial advisor. A copy of policy contract is going to be delivered to you either via email for the electronic copy, or via courier or your financial advisor for the hard copy.
Tips in buying life insurance
- Partner with a reputable life insurance company
Life insurance is a promise. With that in mind, it is important to partner with an insurance company which you can trust to keep the promise made to you and your loved ones. Choose a company that must be licensed insurer in the Philippines.
It would be helpful to consider also the insurer’s financial stability. Good thing, the Insurance Commission always releases an annual list of top insurance companies in the Philippines which you can check. In its 2019 report, for instance, Sun Life of Canada Phils. Inc. ranked no. 1 in terms of premium income and net income – making 2019 its 9th consecutive year being the top insurer.
2. Choose a trusted and expert financial advisor
It is an important decision to choose the right financial advisor, because he will be your partner in achieving your financial goals. It can mean, financial partner for life!
In choosing one, make sure, first and foremost, that he is licensed insurance agent. Insurance commission also issues the licenses of individual agents which are renewable every 3 years. Credentials, character and expertise are factors to consider as well. But the most important is to choose someone you can trust and be comfortable with.
3. Make sure you can afford the premium
A life insurance contract is a commitment. Before you sign a proposal, give thought to your budget if you can afford to pay premiums for the long term. The last thing you want to happen is to lapse your policy when you miss premium payments. When your policy lapse, you will lose your coverage and won’t be able to get a refund. Sure, there is reinstatement option but it also comes with a cost.
4. Read your policy
After receiving your policy contract, make sure you read all the fine print. Take note of the effective date which is the date all the coverage of your policy gets in force. It would be handy to learn the parts of your policy and and understand the jargon to feel more confident. You can ask your financial advisor again to explain it to you during the time he delivers your contract.
If you don’t like your policy, you can return it within 15 days from delivery of your policy and you can receive refund of the premiums you paid.
5. Review your policy periodically
It is recommended to review and revisit your policy every year or whenever you experience a major life event, such as having a child or getting married.
As these certain life changes occur, your financial goals and plan also changes. You may ask your financial advisor to do a sit down review with you to determine if the coverage in your policy is still appropriate for your situation. For example, if your family has grown with a new member/dependent, you’ll most likely need to increase your income protection cover. You would want to update your life insurance policy to add your new family member as a beneficiary as well.
Part of the review is to evaluate also the investment returns of your policy, if yours is a VUL or that with investment component. You can ask your financial advisor to provide you with comparison report between the actual and projected fund value to ascertain if you are on track of your investment goals. With this, you’ll know when there’s a need to put in more into your investment to be on track.
And that’s it with our Life Insurance 101 guide…
If you have decided on securing your financial future or would want to know more about the benefits of life insurance, feel free to book our services here at My Wise Finances. We conduct FREE financial consultation and can help you provide with proposals upon your request.