Question: An Insurance representative had approached me and discussed the features and benefits of their products. I am in the stage right now of planning to get married. I felt the need of having my personal insurance coverage. Please help me understand better the difference on term insurance, whole life, and Variable unit link. From Rod Diadoma (through FB).
In financial planning, Insurance is one of the vital tool to help you on your journey towards financial peace. It provides you a way in protecting your income, and even your tangible asset.
Insurance companies do offer various kind of products that they can provide to any market and these products has its own pros and cons. And here are their differences:
All major Insurance companies provide this kind of product. To easily understand this, you can compare this to car and house insurance coverage. If you cover yourself at this month, it will expire after twelve months. It has term for one year and you need to renew it every year up to age 65 or 70, depends on the insurance company,
it varies. Some Insurance companies do provide like a 5 year term coverage (renewable every after 5 years) or even 10 or 15 years but currently, majority settled to yearly bases term coverage. A good feature of this coverage is that it cost you cheaper compared to other kinds. Take note on this, the premium would rise every year you renew your coverage, it is dependent on your age. Also, it has no dividends and cash value feature that you can take advantage then of.
If you are still on your 20’s or 30’s and has limited resources yet, this coverage would definitely good for you. Also, always remember this, that a serious financial life problem cannot be solved by a temporary solution.
Whole life Insurance
This kind of insurance has its own uniqueness. From its name, whole life, it means you are covered for whole life but technically, mostly companies, would cover the insured up to age 99. I guess age 99 can be considered as your whole life compared to just age 65 or 70. It is the opposite of term insurance. This is a participating kind of program. It gives you dividends and cash value, where you can use it in time of need. Some whole life coverage has a feature of endowment, where you can receive a fix amount on an annual bases after a certain number of years or it really depends on the plan. However, this kind insurance is a little pricy but a good way to solve a serious financial life problem since you are covered for the rest of your life.
At this writing, I found out that mostly major insurance companies have delisted there whole life programs. This is probably of some changes in our current financial market.
Variable Unit Link (VUL)
This is now the hot cake for Insurance people. This kind of Insurance product gives you a combination of term insurance and an investment. The investment part gives you an option to choose where to place your money. If you want to place it in equity fund (stock market), fixed income fund (government or corporate bonds), or even both equity and fixed income – balance fund. But do not be confused, it has no dividends from the plan like the whole life and cash value. The good thing of this, your money will be properly invested by the insurance company’s professional fund manager. However, with the beauty of this product, the cost of charges for this for the first few years is a little pricy.
Do not be confused about its insurance component. It is a term insurance since it would change its monthly charges every year, depends also on the age of the insured. The same concept of the term insurance. But the good thing of this, it will not cover your protection need up to age 70 but up to age 99.
This kind of product has its own sophistication. It has this one time pay plan. Where you can put in larger amount of money to invest but lesser insurance coverage.
Synchronizing to your need
Now, with all being said, it all depends on you. Make sure that you know why you need this product, how you can compute your insurance needs, what company you choose as your provider, and lastly, knowing your personal financial goals and plans. Always remember that this is just a tool for you to achieve your goal. It would still boil down to you, on what you valued the most.
Wishing you all the best and success towards financial freedom and peace.
Serge Barcenas Bargayo is a Registered Financial Planner of RFP Philippines based in Cebu City. To learn more about personal financial planning, attend the 58th RFP program on Nov 5-Dec 10. To register, e-mail firstname.lastname@example.org or text <name><e-mail><RFP> at 0917-9689774.